United States v. Reed

United States District Court for the Southern District of New York · 1985 · Corporations

601 F. Supp. 685 (S.D.N.Y. 1985)

Updated August 22, 2026

Corporationssecurities fraudmisappropriation theorycriminal venueperjuryobstruction of justiceRule 10b-5Section 10(b)

Facts

The indictment alleged that Reed received nonpublic, confidential information from his father, an Amax director, about a proposed confidential merger of Amax into Socal. It further alleged that Reed, in breach of a fiduciary or confidential relationship with his father, traded Amax call options on March 4, 1981 without disclosure and made large profits after public disclosure of the merger proposal. The indictment also alleged that Reed later gave perjurious deposition testimony in San Francisco in related civil litigation and created and used false handwritten notes in California and Virginia that were disclosed outside New York. Reed moved to dismiss, contending the trading counts did not state offenses and that venue for the perjury and obstruction counts did not lie in the Southern District of New York.

Issue

Whether an indictment sufficiently alleges securities fraud and wire fraud where it charges that a defendant misappropriated confidential information from his father in breach of a pre-existing confidential relationship, rather than as a tippee of an insider acting for personal benefit. Also, whether venue in the Southern District of New York was proper for a perjury count based on deposition testimony given in San Francisco and an obstruction count based on acts committed outside New York.

Rule

Under the misappropriation theory recognized in this circuit, a person who misappropriates nonpublic, confidential information in breach of a fiduciary or other confidential relationship and trades on that information to his own advantage may violate Section 10(b), Rule 10b-5, and the wire fraud statute, even absent a duty to disclose to trading counterparties. A confidential relationship is a factual matter that may arise from a pre-existing relationship of trust and confidence and does not invariably require dominance or control, but it cannot be created by a merely unilateral entrustment of confidence. Venue for perjury under Section 1623 lies only in the district where the allegedly false statement was made, and venue for obstruction of justice under Section 1503 lies only in the district where the obstructive acts occurred.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Seattle, Noah Benton regularly discussed sensitive business matters with his aunt, Elise Benton, over several years. Elise served on the board of a mining company and repeatedly told Noah private company information only after he expressly assured her he would keep it confidential. After Elise privately mentioned a nonpublic acquisition proposal, Noah immediately bought the company’s call options and sold them days later for a large profit.

If federal prosecutors charge Noah with securities fraud under a misappropriation theory, what is the strongest basis for denying a motion to dismiss?

Explanation. The governing rule is that misappropriation-based securities fraud may be alleged where the defendant obtained nonpublic confidential information from a source and traded on it in breach of a fiduciary or other confidential relationship with that source. A pre-existing relationship of trust and confidence can suffice. Mere possession is not enough, tippee liability would require an insider breach of duty for personal benefit, and no duty to trading counterparties is required under this theory.