Charles Zandford, a securities broker, persuaded William Wood, an elderly man, to open a joint investment account for himself and his mentally retarded daughter. The Woods gave Mr. Zandford discretion to manage the account and a general power of attorney to engage in securities transactions without their prior approval. Mr. Zandford made personal use of the proceeds from account sales and made other withdrawals from the accounts for his own benefit. When Mr. Wood died a few years later, all of the money he had entrusted to Mr. Zandford was gone. Mr. Zandford was subsequently indicted on federal wire fraud charges. The Securities and Exchange Commission (SEC) then filed a civil complaint alleging that Mr. Zandford had violated §10(b) of the Securities and Exchange Act and the SEC's Rule 10b'“5 by engaging in a scheme to defraud the Woods and misappropriating their securities without their knowledge or consent. After Mr. Zandford was convicted in the criminal case, the District Court granted the SEC summary judgment in the civil case.
The Fourth Circuit reversed and directed the District Court to dismiss the complaint, holding that neither the criminal conviction nor the allegations in the complaint established that Mr. Zandford's fraud was 'in connection with the purchase or sale of any security,' as the SEC statute requires. Because the scheme was to steal the Woods' assets, not to manipulate a particular security, and because the scheme had no relationship to market integrity or investor understanding, the court held that there was no §10(b) violation.
The United States Supreme Court reverses, unanimously ruling that Mr. Zandford's conduct was 'in connection with the purchase or sale of any security.' While acknowledging that the statute's text is 'ambiguous,' the Court holds that the SEC's broad reading of it is entitled to deference. The Court rules that although the sales of the securities were lawful, the sales and Mr. Zandford's practices were not independent events. Because the SEC complaint describes a fraudulent scheme in which the securities transactions and breaches of fiduciary duty coincide, Justice Stevens writes for the Court, '[t]hose breaches were therefore 'in connection with' securities sales within the meaning of §10(b).' The Court notes that its conclusion does not transform every breach of fiduciary duty into a federal securities violation, giving as an example the case of a broker who embezzles cash from a client's account, which the Court says would not include the requisite connection to a purchase or sale of securities.
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