Nature of the Case
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Facts
D was employed as a securities broker. In 1987, he persuaded William Wood, an elderly man in poor health, to open a joint investment account for himself and his mentally retarded daughter. The 'stated investment objectives for the account were 'safety of principal and income.'' The Woods granted D discretion to manage their account and a general power of attorney to engage in securities transactions for their benefit without prior approval. The Woods entrusted D with $ 419,255. Before Mr. Wood's death in 1991, all of that money was gone. NASD conducted a routine examination of D's firm and discovered that on over 25 separate occasions, money had been transferred from the Woods' account to accounts controlled by D. D was indicted on 13 counts of wire fraud in violation of 18 U.S.C. § 1343. Some of those transfers involved D writing checks to himself from a mutual fund account held by the Woods, which required liquidating securities in order to redeem the checks. D was convicted on all counts, sentenced to prison for 52 months, and ordered to pay $10,800 in restitution. P filed a civil complaint in the same District Court alleging that D violated §10(b) and Rule 10b-5 by engaging in a scheme to defraud the Woods and by misappropriating approximately $343,000 of the Woods' securities without their knowledge or consent. P moved for partial summary judgment after D's criminal conviction. D filed a motion seeking discovery on the question whether his fraud had the requisite 'connection with' the purchase or sale of a security. The District Court entered summary judgment against D. D appealed. The Court of Appeals for the Fourth Circuit reversed. It held that the wire fraud conviction, which only required two findings -- (1) that respondent engaged in a scheme to defraud and (2) that he used interstate wire communications in executing the scheme -- did not establish all the elements of a § 10(b) violation. The conviction did not necessarily establish that his fraud was 'in connection with' the sale of a security. It held that the sales of the Woods' securities were merely incidental to a fraud that 'lay in absconding with the proceeds' of sales that were conducted in 'a routine and customary fashion.' D's goal was to steal the Woods' assets' rather than to engage 'in manipulation of a particular security.' It held in a fraud on the market theory that without some 'relationship to market integrity or investor understanding,' there is no violation of § 10(b). The Supreme Court granted certiorari.
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