United States v. Robert Chestman

947 F.2d 551, 1991 U.S. App. LEXIS 23242, 1991 WL 201217

• Court: Court of Appeals for the Second Circuit
• Decided: October 7, 1991
• Docket: 309, Docket 89-1276
• Status: Published

Opinions

MINER, Circuit Judge,

concurring:

I concur in the comprehensive opinion of Judge Meskill, which I take to be wholly in accordance with the views I expressed in the original panel opinion as to all the issues before us. See United States v. Chestman, 903 F.2d 75 (2d Cir.1990). I write only to comment upon the “familial relationship” rule of insider trading proposed by Judge Winter in his partially dissenting opinion.

The rule urged upon us would impose a duty of nondisclosure upon “a family member (i) who has received or expects (e.g., through inheritance) benefits from family control of a corporation, here gifts of stock, (ii) who is in a position to learn confidential corporate information through ordinary family interactions, and (iii) who knows that under the circumstances both the corporation and the family desire confidentiality.” At 580. The duty is said to consist of an obligation “not to use information so obtained for personal profit where the use risks disclosure.” Id.

The rationale for the proposed rule apparently is rooted in the notion that family members would be encouraged to speak freely on all matters pertaining to the family, knowing that the lips of those who receive confidential corporate information in the course of ongoing family interchanges would be sealed. Thus, in this case, so the argument goes, Ira Waldbaum could reveal the pending stock sale to his sister, Shirley Witkin, who could reveal it to her daughter, Susan Loeb, who could reveal it to her husband, Keith Loeb, all with the understanding that a duty imposed by law on each family member would protect against use of the confidential information for profit. Without the rule, it is maintained, family members in this case would have been inhibited from discussing such matters as the reason for Shirley Witkin’s unusual absence from her home, because such a discussion inevitably would lead to disclosure of the confidential information regarding the sale of Waldbaum stock to A & P.

It seems to me, however, that family discourse would be inhibited, rather than promoted, by a rule that would automatically assure confidentiality on the part of a family member receiving non-public corporate information. What speaker, secure in the knowledge that a relative could be prosecuted for insider trading, would reveal to that relative anything remotely connected with corporate dealings? Given the uncertainties surrounding the definition of insider trading, a term as yet unclarified by Congress, what family members would want to receive any information whatsoever that might bear on the family business? How could family news be disseminated freely in an atmosphere where the members must be ultra-sensitive to whether “both the corporation and the family” are seeking some measure of confidentiality “under the circumstances.”

The difficulty of identifying those who would be covered by the proposed familial rule adds an additional element of uncertainty to what already are uncertain crimes. It is not clear just who would be subject to the duty of confidentiality: family members “who ha[ve] received or expect[ ] ... benefits from family control of a corporation” belong to a very broad category indeed. Here, those who have received gifts of stock are included. But does the category include those who have received only small amounts of stock? Does it matter what proportion the stock bears to the total issued and outstanding shares? Does the category include one who expects to receive stock through inheritance but never receives any? Does it include grandchildren who expect ultimately to inherit assets purchased with the proceeds of the sale of the family-controlled corporation? The net would be spread wider than appropriate in a criminal context. Cf. Cantwell v. Connecticut, 310 U.S. 296, 308, 60 S.Ct. 900, 905, 84 L.Ed. 1213 (1940) (“Here we have a situation analogous to a conviction under a statute sweeping in a great variety of conduct under a general and indefinite characterization, and leaving to the executive and judicial branches too wide a discretion in its application”).

In the same vein, it is conceivable that minor children could find themselves “in a position to learn confidential corporate information through ordinary family interactions.” If they came into the possession of such information and somehow acquired the knowledge “that under the circumstances both the corporation and the family desire[d] confidentiality,” would they become tippers who would expose other family members to criminal liability as tippees when they passed the information along?

It is important to note that in the case at bar we deal with an attenuated trail of family confidences in which information was received without any assurance of confidentiality by the receiver and without any prior sharing of business information within the family. Neither Shirley Witkin nor her daughter nor her son-in-law were involved in any way in the operation of the Waldbaum business or privy to any of its past secrets. Family relationships being what they are, it makes little sense under the circumstances to imply assurances that confidentiality would be maintained. Of course, a different situation obtains where the giver of business confidences, in addition to having a family relationship with the receiver, also has a history of reposing such confidences in the receiver. See United States v. Reed, 601 F.Supp. 685, 712, 717 (S.D.N.Y.), rev’d on other grounds, 773 F.2d 477 (2d Cir.1985) (son of corporate director as receiver of non-public corporate information). Under those circumstances, the duty of confidentiality is implied from the business relationship coupled with the family one.

Finally, to further extend the concept of confidential duty would be to take the courts into an area of securities regulation not yet entered by Congress. It would give the wrong signal to prosecutors in their continuing efforts to push against existing boundaries in the prosecution of securities fraud cases. “[Pjrosecutors can often claim that some confidential relationship was abused — whether between lovers, family members, longtime friends, or simply that well-known confidential relationship between bartender and drunk. Such a test inherently creates legal uncertainty and invites selective prosecutions.” Coffee, Outsider Trading, That New Crime, Wall St.J., Nov. 14, 1990, at 16, col. 4. I would await further instructions from Congress before sailing into this unchartered area.