Cengage Advantage Books: Foundations of the Legal Environment of Business 2nd Edition by Marianne Jennings, Albert Napier, Marianne Jennings

Exercise 2

Beginning in March 1981, R. Foster Winans was a Wall Street Journal reporter and one of the writers of the "Heard on the Street" column (the "Heard" column), a widely read and influential column in the Journal. David Carpenter worked as a news clerk at the Journal from December 1981 through May 1983. Kenneth Felis, who was a stockbroker at the brokerage house of Kidder Peabody, had been brought to that firm by another Kidder Peabody stockbroker, Peter Brant, Mr. Felis's longtime friend, who later became the government's key witness in this case.
Since February 2, 1981, it had been the practice of Dow Jones, the parent company of the Wall Street Journal, to distribute to all new employees "The Insider Story," a 40-page manual with 7 pages devoted to the company's conflicts-of-interest policy. Mr. Winans and Mr. Carpenter knew that company policy deemed all news material gleaned by an employee during the course of employment to be company property and that company policy required employees to treat nonpublic information learned on the job as confidential.
Notwithstanding company policy, Mr. Winans participated in a scheme with Mr. Brant, and later Mr. Felis and Mr. Carpenter, in which he agreed to provide the two stockbrokers (Mr. Brant and Mr. Felis) with securitiesrelated information that was scheduled to appear in "Heard" columns; based on this advance information, the two brokers would buy or sell the subject securities. Mr. Carpenter, who was involved in a private, personal, nonbusiness relationship with Mr. Winans, served primarily as a messenger for the conspirators. Trading accounts were established in the names of Kenneth Felis, David Carpenter, R. Foster Winans, Peter Brant, David Clark, Western Hemisphere, and Stephen Spratt. During 1983 and early 1984, these defendants made prepublication trades on the basis of their advance knowledge of approximately 27 Wall Street Journal "Heard" columns, although not all of those columns were written by Mr. Winans. Generally, he would inform Mr. Brant of an article's subject the day before its scheduled publication, usually by calls from a pay phone and often using a fictitious name. The net profits from the scheme approached $690,000. Was this scheme a 10(b) violation? [ United States v Carpenter, 791 F.2d 1024 (2d Cir. 1986); affirmed, Carpenter v United States, 484 U.S. 19 (1987)]