After the Supreme Court’s unanimous decision in Carpenter v. United States, the federal mail and wire fraud statutes became potent prosecutorial weapons against insider trading when the information-owner is the victim. This post examines how criminal liability under the federal mail and wire fraud statutes supplements traditional SEC authority to pursue insider trading. SEC Rules 14e-3 and 10b-5 cover a great deal of stock market insider trading and tipping, but certainly not all. For instance, Rule 14e-3 is confined to the tender offer context.
As illustrated by the recent case of United States v. Newman, the Rule 10b-5 “classical relationship” theory may not be available for some insider trading and tipping. With stock market insider trading and tipping generally, a possible alternative to the Rule 10b-5 “classical relationship” theory is Rule 10b-5 misappropriation. Somewhat similar to Rule 10b-5 misappropriation is mail/wire fraud on the confidential-information property-owner. This latter breach might be more extensive than, co-extensive with, or less extensive than Rule 10b-5 misappropriation (although Rule 10b-5 does not apply to insider trading that does not relate to a “security,” e.g., commodities insider trading).
Suppose, however, neither Rule 10b-5 misappropriation nor mail/wire fraud on the information-owner is available, perhaps because the information source/owner gave permission to trade or tip or possibly because the defendant disclosed in advance to the information source/owner the plan to trade or tip. In that situation, an alternative possible victim of mail/wire fraud is the party on the other side of the insider trade. It is uncertain whether, for stock market insider traders, the necessary mail/wire fraud relationship is broader, narrower, or the same as the requisite Rule 10b-5 “classical relationship.” Thus far, virtually no courts have considered the insider trader’s mail/wire fraud duty to disclose to the party on the other side of the transaction. Under mail/wire fraud, a stock market insider trader might conceivably have a duty to disclose to the party on the other side even in the absence of a Rule 10b-5 “classical relationship.” A related unexamined issue is whether an employee engaging in an insider trade of her company’s stock could be criminally liable under two different mail/wire fraud theories with two separate mail/wire fraud victims: the company/information-owner and the party on the other side of the trade.
With stock market insider trading for mail/wire fraud, the materiality standard may be: (1) laxer (beyond “reasonable person”) or (2) in cases involving deprivation of informational property, different (importance to the owner of the information as opposed to a stock market investor). Consequently, the government may be able to use mail/wire fraud when SEC Rule 10b-5 does not apply.
As noted earlier, the Second Circuit recently made it harder to meet the Rule 10b-5 tests for tipper and tippee liability. Under the Rule 10b-5 “classical relationship” theory and probably the Rule 10b-5 misappropriation doctrine, the initial tipper must receive a “personal benefit.” Under the Rule 10b-5 “classical relationship” theory and probably the Rule 10b-5 misappropriation doctrine, each direct and remote tippee must “know or should know” of the initial tipper’s violation. It is unclear whether the same requirements apply to the mail/wire fraud liability of tippers and tippees. Again, were the standards laxer for mail/wire fraud, the government would be able to use mail/wire fraud when Rule 10b-5 does not apply.
With stock market insider trading, several Supreme Court Justices and Judge Ralph K. Winter have said that mail/wire fraud is broader than Exchange Act Section 10(b)/SEC Rule 10b-5. In the insider trading case, O’Hagan, the Supreme Court majority said: “Just as in Carpenter, so here, the `mail fraud charges are independent of [the] securities fraud charges, even [though] both rest on the same set of facts.’”
For stock market insider trading, some elements of liability may be different and possibly easier to satisfy under mail/wire fraud than under SEC Rule 10b-5. The courts have largely failed to explore these differences.
 484 U.S. 19 (1987).
 773 F.3d 438 (2d Cir. 2014).
In the Supreme Court case that created the “classical relationship” theory, Chiarella v. United States, 445 U.S. 222 (1980), the defendant himself was not liable under the doctrine. See id. at 225-35.
 For discussion of why no Rule 10b-5 misappropriation occurs if the information source grants permission to trade or tip, see United States v. O’Hagan, 521 U.S. 642, 653–55, 659 n.9 (1997); William K.S. Wang & Marc I. Steinberg, Insider Trading (3d ed. 2010) § 5.4 nn.551–53 and accompanying text.
 For discussion of why Rule 10b-5 misappropriation might not occur if the defendant discloses in advance to the information source the plan to trade or tip, see O’Hagan, 521 U.S. at 653–55, 659 n.9; Wang & Steinberg, supra note 4, § 5.4.1[B] nn.612–14 and accompanying text.
 For discussion of the overlap between the Rule 10b-5 misappropriation doctrine and the Rule 10b-5 “classical relationship” theory, see Wang & Steinberg, supra note 4, § 5.4.11.
 In Carpenter itself, the Supreme Court split evenly on the Rule 10b-5 misappropriation convictions, but unanimously upheld the mail/wire fraud convictions based on the deprivation of confidential information-property. See Carpenter v. United States, 484 U.S. 19 (1987).
In their concurring and dissenting opinion in the insider trading case of United States v. O’Hagan, 521 U.S. 642 (1997), Justice Thomas, and Chief Justice Rehnquist stated that they would reverse O’Hagan’s convictions under Rule 10b-5 (because of a rejection of the Rule 10b-5 misappropriation doctrine) but in effect sustain O’Hagan’s mail fraud convictions. See id. at 680–701 (Thomas, J., and Rehnquist, C.J., concurring in part and dissenting in part). Justice Thomas (and Chief Justice Rehnquist) commented:
While the majority may find it strange that the “mail fraud net” is broader reaching than the securities fraud net, ante, at 2220, n. 25 [521 U.S. at 678 n.25], any such supposed strangeness—and the resulting allocation of prosecutorial responsibility between the Commission and the various United States Attorneys—is no business of this Court, and can be adequately addressed by Congress if it too perceives a problem regarding jurisdictional boundaries among the Nation’s prosecutors.
Id. at 701 n.13.
Invoking the rule of lenity, Justice Scalia, with almost no discussion, also said that he would reverse the Rule 10b-5 convictions but in effect affirm the mail fraud convictions. See id. at 679 (Scalia, J., concurring in part and dissenting in part).
Technically, the Court remanded to the Eighth Circuit for consideration of O’Hagan’s objections to his mail fraud convictions not considered by the Eighth Circuit. See id. at 677-78. Justice Scalia joined in this part of the majority’s opinion. See id. at 679 (Scalia, J., concurring in part and dissenting in part). Justice Thomas and Chief Justice Rehnquist concurred in this part of the majority’s opinion. See id. at 680, 700–01 (Thomas, J., and Rehnquist, C.J., concurring in part and dissenting in part).
On remand, the Eighth Circuit affirmed O’Hagan’s convictions on the mail fraud and other counts. See United States v. O’Hagan, 139 F.3d 641 (8th Cir. 1998).
 See United States v. Chestman, 947 F.2d 551, 581-82 (2d Cir. 1991) (Winter J., dissenting):
I am unclear as to whether the [tipper’s] breach of duty and the tippee’s knowledge of that breach as required by Dirks is coextensive with the similar requirements in [the mail/wire fraud decision] in Carpenter. The Dirks rule is derived from securities law, and its limitation to information obtained through a breach of fiduciary duty is, as noted, influenced by the need to allow persons to profit from generating information about firms so that the pricing of securities is efficient. The Carpenter rule, however, is derived from the law of theft or embezzlement, and a tippee’s liability may be governed by rules concerning the possession of stolen property. Logic is therefore not a barrier to the growth of disparate rules concerning a tippee’s liability depending on whether Section 10(b) or mail fraud is the source of law. However, because under any such disparity in rules the Section 10(b) charge would be harder to prove than a mail fraud charge, I need not explore the issue further.
 United States v. O’Hagan, 521 U.S. 642, 678 (1997) (bracketed material in original) (quoting Brief for United States 46-47).
The preceding post comes to us from William K. S. Wang, Professor of Law at the University of California Hastings College of Law. The post is based on his recent article entitled “Application of the Federal Mail and Wire Fraud Statutes to Criminal Liability for Stock Market Insider Trading and Tipping,” which is forthcoming in Volume 70 of the University of Miami Law Review and available here.