SECURITIES AND EXCHANGE COMMISSION v. ZANDFORD

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813 OCTOBER TERM, 2001
Syllabus
SECURITIES AND EXCHANGE COMMISSION v.
ZANDFORD
certiorari to the united states court of appeals for
the fourth circuit
No. 01–147. Argued March 18, 2002—Decided June 3, 2002
Respondent broker persuaded William Wood, an elderly man, to open a
joint investment account for himself and his mentally retarded daughter.
The Woods gave respondent discretion to manage the account and a
general power of attorney to engage in securities transactions without
their prior approval. When Mr. Wood died a few years later, all of
the money he had entrusted to respondent was gone. Respondent was
subsequently indicted on federal wire fraud charges for, inter alia, sell-
ing securities in the Woods’ account and making personal use of the
proceeds. The Securities and Exchange Commission (SEC) then filed
a civil complaint in the same District Court, alleging that respondent
had violated § 10 of the Securities Exchange Act of 1934 (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 respondent’s conviction in the criminal case, the District Court
granted the SEC summary judgment in the civil case. The Fourth Cir-
cuit reversed and directed the District Court to dismiss the complaint,
holding that neither the criminal conviction nor the allegations in the
complaint established that respondent’s fraud was “in connection with
the purchase or sale of any security.” Because the scheme was to steal
the Woods’ assets, not to manipulate a particular security, and it had no
relationship to market integrity or investor understanding, the court
held that there was no § 10(b) violation.
Held: Assuming that the complaint’s allegations are true, respondent’s
conduct was “in connection with the purchase or sale of any security.”
Among Congress’ objectives in passing the Act was to ensure honest
securities markets and thereby promote investor confidence after the
1929 market crash. Congress sought “ ‘to substitute a philosophy of
full disclosure for the philosophy of caveat emptor and thus to achieve
a high standard of business ethics in the securities industry.’ ” Affili-
ated Ute Citizens of Utah v. United States, 406 U. S. 128, 151. To effec-
tuate its remedial purposes, the Act should be construed flexibly, not
technically and restrictively. The SEC has consistently adopted a
broad reading of “in connection with the purchase or sale of any secu-

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814 SEC v. ZANDFORD
Syllabus
rity,” maintaining that a broker who accepts payment for securities that
he never intends to deliver, or who sells securities with intent to misap-
propriate the proceeds, violates § 10(b) and Rule 10(b)–5. This inter-
pretation of the statute’s ambiguous text in the context of formal adjudi-
cation is entitled to deference. See United States v. Mead Corp., 533
U. S. 218, 229–230. Neither the SEC nor this Court has ever held that
there must be a misrepresentation about a particular security’s value in
order to run afoul of the Act. This Court disagrees with respondent’s
claim that his misappropriation of the proceeds, though fraudulent, does
not have the requisite connection with the sales, which were perfectly
lawful. The securities sales and respondent’s practices were not inde-
pendent events. Taking the complaint’s allegations as true, each sale
was made to further his fraudulent scheme; and each was deceptive
because it was neither authorized by, nor disclosed to, the Woods. In
the aggregate, the sales are properly viewed as a course of business
that operated as a fraud or deceit on a stockbroker’s customer. As in
Superintendent of Ins. of N. Y. v. Bankers Life & Casualty Co., 404
U. S. 6; Wharf (Holdings) Ltd. v. United Int’l Holdings, Inc., 532 U. S.
588; and United States v. O’Hagan, 521 U. S. 642, all cases in which
this Court found a § 10(b) violation, the SEC complaint here describes a
fraudulent scheme in which the securities transactions and breaches of
fiduciary duty coincide. Those breaches were therefore “in connection
with” securities sales within § 10(b)’s meaning. Pp. 819–825.
238 F. 3d 559, reversed and remanded.
Stevens, J., delivered the opinion for a unanimous Court.
Matthew D. Roberts argued the cause for petitioner.
With him on the briefs were Acting Solicitor General
Clement, Deputy Solicitor General Kneedler, David M.
Becker, Jacob H. Stillman, Richard M. Humes, Katharine
B. Gresham, and Susan S. McDonald.
Steven H. Goldblatt argued the cause for respondent.
With him on the brief was Roy T. Englert, Jr.*
*Briefs of amici curiae urging reversal were filed for AARP et al. by
Deborah M. Zuckerman, Stacy J. Canan, Michael R. Schuster, and Kevin
Roddy; and for NASD Regulation, Inc., by F. Joseph Warin, Douglas R.
Cox, Andrew S. Tulumello, and Elisse B. Walter.

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815 Cite as: 535 U. S. 813 (2002)
Opinion of the Court
Justice Stevens delivered the opinion of the Court.
The Securities and Exchange Commission (SEC) filed a
civil complaint alleging that a stockbroker violated both
§ 10(b) of the Securities Exchange Act of 1934, 48 Stat. 891,
as amended, 15 U. S. C. § 78j(b), and the SEC’s Rule 10b–5,
by selling his customer’s securities and using the proceeds
for his own benefit without the customer’s knowledge or con-
sent. The question presented is whether the alleged fraud-
ulent conduct was “in connection with the purchase or sale
of any security” within the meaning of the statute and the
Rule.
I
Between 1987 and 1991, respondent was employed as a
securities broker in the Maryland branch of a New York
brokerage firm. 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. Ac-
cording to the SEC’s complaint, the “stated investment
objectives for the account were ‘safety of principal and
income.’ ” App. to Pet. for Cert. 27a. The Woods granted
respondent discretion to manage their account and a general
power of attorney to engage in securities transactions for
their benefit without prior approval. Relying on respond-
ent’s promise to “conservatively invest” their money, the
Woods entrusted him with $419,255. Before Mr. Wood’s
death in 1991, all of that money was gone.
In 1991, the National Association of Securities Dealers
(NASD) conducted a routine examination of respondent’s
firm and discovered that on over 25 separate occasions,
money had been transferred from the Woods’ account to ac-
counts controlled by respondent. In due course, respondent
was indicted in the United States District Court for the Dis-
trict of Maryland on 13 counts of wire fraud in violation of
18 U. S. C. § 1343. App. to Pet. for Cert. 40a. The first
count alleged that respondent sold securities in the Woods’
account and then made personal use of the proceeds. Id., at

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816 SEC v. ZANDFORD
Opinion of the Court
42a. Each of the other counts alleged that he made wire
transfers between Maryland and New York that enabled him
to withdraw specified sums from the Woods’ accounts. Id.,
at 42a–50a. Some of those transfers involved respondent
writing checks to himself from a mutual fund account held
by the Woods, which required liquidating securities in order
to redeem the checks. Respondent was convicted on all
counts, sentenced to prison for 52 months, and ordered to
pay $10,800 in restitution.
After respondent was indicted, the SEC filed a civil com-
plaint in the same District Court alleging that respondent
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. Id., at 27a. The SEC moved for partial summary
judgment after respondent’s criminal conviction, arguing
that the judgment in the criminal case estopped respondent
from contesting facts that established a violation of § 10(b).1
Respondent 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 refused
to allow discovery and entered summary judgment against
respondent. It enjoined him from engaging in future viola-
tions of the securities laws and ordered him to disgorge
$343,000 in ill-gotten gains.
The Court of Appeals for the Fourth Circuit reversed the
summary judgment and remanded with directions for the
District Court to dismiss the complaint. 238 F. 3d 559
1 The scope of Rule 10b–5 is coextensive with the coverage of § 10(b),
see United States v. O’Hagan, 521 U. S. 642, 651 (1997); Ernst & Ernst
v. Hochfelder, 425 U. S. 185, 214 (1976); therefore, we use § 10(b) to refer
to both the statutory provision and the Rule.
The complaint also contained allegations that respondent had engaged
in excessive trading, or “churning,” to generate commission income. App.
to Pet. for Cert. 30a. That claim was originally excluded from the sum-
mary judgment motion, and later abandoned by the SEC.

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Opinion of the Court
(2001). It first 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. Specifically, the con-
viction did not necessarily establish that his fraud was
“in connection with” the sale of a security. Id., at 562.2
The court then held that the civil complaint did not suffi-
ciently allege the necessary connection because the sales of
the Woods’ securities were merely incidental to a fraud that
“lay in absconding with the proceeds” of sales that were con-
ducted in “a routine and customary fashion,” id., at 564. Re-
spondent’s “scheme was simply to steal the Woods’ assets”
rather than to engage “in manipulation of a particular secu-
2 A summary of the evidence in the Court of Appeals’ opinion affirming
the judgment in respondent’s criminal case supports the conclusion that
the verdict did not necessarily determine that the fraud was connected
with the sale of a security:
“The Government presented ample direct and circumstantial evidence
showing that Zandford had engaged in a scheme to defraud the Woods.
It showed that: (1) Zandford had systematically transferred large sums of
money from the Woods’ account to his own accounts over a nineteen month
period; (2) prior to November 1987, the Woods had no relationship with
Zandford; (3) Zandford, and not the Woods, benefited from the money
transfers; (4) the Woods were vulnerable victims due to their physical and
mental limitations; (5) the personal services agreement, the loan, and the
vintage car restoration business were not only contrary to the Woods’
stated investment objectives, but they violated the rules of NASD and
those of Zandford’s employer that prohibited brokers from engaging in
such arrangements; and (6) vehicles owned as part of the vintage car resto-
ration business were titled in the name of Zandford’s girlfriend as opposed
to the Woods’ names. Additional evidence showing a scheme to defraud
included Zandford’s failure to disclose to his employer the existence of the
agreements and personal loans; his failure to report on his taxes or bank
loan applications that he received income from acting as the personal rep-
resentative; and his failure to disclose on his taxes his involvement in
a vintage car restoration business. Zandford’s contention that there is
insufficient evidence supporting that he had engaged in a scheme to de-
fraud the Woods is meritless.” Id., at 36a–37a.

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818 SEC v. ZANDFORD
Opinion of the Court
rity.” Id., at 565. Ultimately, the court refused “to stretch
the language of the securities fraud provisions to encompass
every conversion or theft that happens to involve securities.”
Id., at 566. Adopting what amounts to a “fraud on the mar-
ket” theory of the statute’s coverage, the court held that
without some “relationship to market integrity or investor
understanding,” there is no violation of § 10(b). Id., at 563.
We granted the SEC’s petition for a writ of certiorari, 534
U. S. 1015 (2001), to review the Court of Appeals’ construc-
tion of the phrase “in connection with the purchase or sale
of any security.” Because the Court of Appeals ordered the
complaint dismissed rather than remanding for reconsidera-
tion, we assume the allegations contained therein are true
and affirm that disposition only if no set of facts would en-
title petitioner to relief. See Hartford Fire Ins. Co. v. Cali-
fornia, 509 U. S. 764, 811 (1993). We do not reach the ques-
tion whether the record supports the District Court’s grant
of summary judgment in the SEC’s favor—a question that
requires all potential factual disputes to be resolved in re-
spondent’s favor.3 We merely hold that the allegations of
the complaint, if true, entitle the SEC to relief; therefore,
the Court of Appeals should not have directed that the com-
plaint be dismissed.
3 Nor do we review the District Court’s decision denying respondent
discovery—a decision that may have been influenced by respondent’s fre-
quent filings while incarcerated. The District Court noted that respond-
ent “has been an active litigant before and during his incarceration.” Id.,
at 16a, n. 1 (citing Zandford v. NASD, 30 F. Supp. 2d 1 (DC 1998); Zand-
ford v. NASD, 19 F. Supp. 2d 1 (DC 1998); Zandford v. NASD, 19
F. Supp. 2d 4 (DC 1998); Zandford v. Prudential-Bache Securities, Inc.,
112 F. 3d 723 (CA4 1997); Zandford v. Prudential-Bache Securities, Inc.,
111 F. 3d 963 (DC 1998) ( judgt. order); Zandford v. Prudential-Bache
Securities, Inc., Civ. Action No. 94–0036, 1995 WL 507169 (D. D. C., Aug.
15, 1995); Zandford v. Prudential-Bache Securities, Inc., Civ. Action
No. HAR–90–2568, 1994 WL 150918 (D. Md., Feb. 22, 1994); Zandford v.
NASD, Civ. Action No. 93–1274, 1993 WL 580761 (D. D. C., Nov. 5, 1993)).

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Opinion of the Court
II
Section 10(b) of the Securities Exchange Act makes it “un-
lawful for any person . . . [t]o use or employ, in connection
with the purchase or sale of any security . . . , any manipu-
lative or deceptive device or contrivance in contravention
of such rules and regulations as the [SEC] may prescribe.”
15 U. S. C. § 78j. Rule 10b–5, which implements this provi-
sion, forbids the use, “in connection with the purchase or sale
of any security,” of “any device, scheme, or artifice to de-
fraud” or any other “act, practice, or course of business” that
“operates . . . as a fraud or deceit.” 17 CFR § 240.10b–5
(2000). Among Congress’ objectives in passing the Act was
“to insure honest securities markets and thereby promote
investor confidence” after the market crash of 1929. United
States v. O’Hagan, 521 U. S. 642, 658 (1997); see also United
States v. Naftalin, 441 U. S. 768, 775 (1979). More generally,
Congress sought “ ‘to substitute a philosophy of full disclo-
sure for the philosophy of caveat emptor and thus to achieve
a high standard of business ethics in the securities indus-
try.’ ” Affiliated Ute Citizens of Utah v. United States, 406
U. S. 128, 151 (1972) (quoting SEC v. Capital Gains Research
Bureau, Inc., 375 U. S. 180, 186 (1963)).
Consequently, we have explained that the statute should
be “construed ‘not technically and restrictively, but flexibly
to effectuate its remedial purposes.’ ” 406 U. S., at 151
(quoting Capital Gains Research Bureau, Inc., 375 U. S., at
195). In its role enforcing the Act, the SEC has consistently
adopted a broad reading of the phrase “in connection with
the purchase or sale of any security.” It has maintained
that a broker who accepts payment for securities that he
never intends to deliver, or who sells customer securities
with intent to misappropriate the proceeds, violates § 10(b)
and Rule 10b–5. See, e. g., In re Bauer, 26 S. E. C. 770
(1947); In re Southeastern Securities Corp., 29 S. E. C. 609
(1949). This interpretation of the ambiguous text of § 10(b),
in the context of formal adjudication, is entitled to deference

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Opinion of the Court
if it is reasonable, see United States v. Mead Corp., 533 U. S.
218, 229–230, and n. 12 (2001). For the reasons set forth
below, we think it is. While the statute must not be con-
strued so broadly as to convert every common-law fraud that
happens to involve securities into a violation of § 10(b), Ma-
rine Bank v. Weaver, 455 U. S. 551, 556 (1982) (“Congress, in
enacting the securities laws, did not intend to provide a
broad federal remedy for all fraud”), neither the SEC nor
this Court has ever held that there must be a misrepresenta-
tion about the value of a particular security in order to run
afoul of the Act.
The SEC claims respondent engaged in a fraudulent
scheme in which he made sales of his customer’s securities
for his own benefit. Respondent submits that the sales
themselves were perfectly lawful and that the subsequent
misappropriation of the proceeds, though fraudulent, is not
properly viewed as having the requisite connection with the
sales; in his view, the alleged scheme is not materially differ-
ent from a simple theft of cash or securities in an investment
account. We disagree.
According to the complaint, respondent “engaged in a
scheme to defraud” the Woods beginning in 1988, shortly
after they opened their account, and that scheme continued
throughout the 2-year period during which respondent made
a series of transactions that enabled him to convert the
proceeds of the sales of the Woods’ securities to his own
use. App. to Pet. for Cert. 27a–29a. The securities sales
and respondent’s fraudulent practices were not independent
events. This is not a case in which, after a lawful trans-
action had been consummated, a broker decided to steal
the proceeds and did so. Nor is it a case in which a thief
simply invested the proceeds of a routine conversion in the
stock market. Rather, respondent’s fraud coincided with
the sales themselves.
Taking the allegations in the complaint as true, each sale
was made to further respondent’s fraudulent scheme; each

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was deceptive because it was neither authorized by, nor dis-
closed to, the Woods. With regard to the sales of shares in
the Woods’ mutual fund, respondent initiated these transac-
tions by writing a check to himself from that account, know-
ing that redeeming the check would require the sale of secu-
rities. Indeed, each time respondent “exercised his power
of disposition for his own benefit,” that conduct, “without
more,” was a fraud. United States v. Dunn, 268 U. S. 121,
131 (1925). In the aggregate, the sales are properly viewed
as a “course of business” that operated as a fraud or deceit
on a stockbroker’s customer.
Insofar as the connection between respondent’s deceptive
practices and his sale of the Woods’ securities is concerned,
the case is remarkably similar to Superintendent of Ins.
of N. Y. v. Bankers Life & Casualty Co., 404 U. S. 6 (1971).
In that case the directors of Manhattan Casualty Company
authorized the sale of the company’s portfolio of treasury
bonds because they had been “duped” into believing that the
company would receive the proceeds of the sale. Id., at 9.
We held that “Manhattan was injured as an investor through
a deceptive device which deprived it of any compensation for
the sale of its valuable block of securities.” Id., at 10. In
reaching this conclusion, we did not ask, as the Fourth Cir-
cuit did in this case, whether the directors were misled about
the value of a security or whether the fraud involved “manip-
ulation of a particular security.” 238 F. 3d, at 565. In fact,
we rejected the Second Circuit’s position in Superintendent
of Ins. of N. Y. v. Bankers Life & Casualty Co., 430 F. 2d
355, 361 (1970), that because the fraud against Manhattan did
not take place within the context of a securities exchange it
was not prohibited by § 10(b). 404 U. S., at 10. We refused
to read the statute so narrowly, noting that it “must be read
flexibly, not technically and restrictively.” Id., at 12. Al-
though we recognized that the interest in “ ‘preserving the
integrity of the securities markets’ ” was one of the purposes
animating the statute, we rejected the notion that § 10(b) is

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limited to serving that objective alone. Ibid. (“We agree
that Congress by § 10(b) did not seek to regulate transactions
which constitute no more than internal corporate misman-
agement. But we read § 10(b) to mean that Congress meant
to bar deceptive devices and contrivances in the purchase or
sale of securities whether conducted in the organized mar-
kets or face to face”).
Like the company directors in Bankers Life, the Woods
were injured as investors through respondent’s deceptions,
which deprived them of any compensation for the sale of
their valuable securities. They were duped into believing
respondent would “conservatively invest” their assets in the
stock market and that any transactions made on their behalf
would be for their benefit for the “ ‘safety of principal and
income.’ ” App. to Pet. for Cert. 27a. The fact that re-
spondent misappropriated the proceeds of the sales provides
persuasive evidence that he had violated § 10(b) when he
made the sales, but misappropriation is not an essential
element of the offense. Indeed, in Bankers Life, we flatly
stated that it was “irrelevant” that “the proceeds of the sale
that were due the seller were misappropriated.” 404 U. S.,
at 10. It is enough that the scheme to defraud and the sale
of securities coincide.
The Court of Appeals below distinguished Bankers Life on
the ground that it involved an affirmative misrepresentation,
whereas respondent simply failed to inform the Woods of his
intent to misappropriate their securities. 238 F. 3d, at 566.
We are not persuaded by this distinction. Respondent was
only able to carry out his fraudulent scheme without making
an affirmative misrepresentation because the Woods had
trusted him to make transactions in their best interest with-
out prior approval. Under these circumstances, respond-
ent’s fraud represents an even greater threat to investor
confidence in the securities industry than the misrepresenta-
tion in Bankers Life. Not only does such a fraud prevent
investors from trusting that their brokers are executing

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transactions for their benefit, but it undermines the value of
a discretionary account like that held by the Woods. The
benefit of a discretionary account is that it enables individu-
als, like the Woods, who lack the time, capacity, or know-how
to supervise investment decisions, to delegate authority to a
broker who will make decisions in their best interests with-
out prior approval. If such individuals cannot rely on a
broker to exercise that discretion for their benefit, then the
account loses its added value. Moreover, any distinction be-
tween omissions and misrepresentations is illusory in the
context of a broker who has a fiduciary duty to her clients.
See Chiarella v. United States, 445 U. S. 222, 230 (1980) (not-
ing that “silence in connection with the purchase or sale of
securities may operate as a fraud actionable under § 10(b)”
when there is “a duty to disclose arising from a relationship
of trust and confidence between parties to a transaction”);
Affiliated Ute Citizens of Utah v. United States, 406 U. S.,
at 153.
More recently, in Wharf (Holdings) Ltd. v. United Int’l
Holdings, Inc., 532 U. S. 588 (2001), our decision that the
seller of a security had violated § 10(b) focused on the secret
intent of the seller when the sale occurred. The purchaser
claimed “that Wharf sold it a security (the option) while se-
cretly intending from the very beginning not to honor the
option.” Id., at 597. Although Wharf did not specifically
argue that the breach of contract underlying the complaint
lacked the requisite connection with a sale of securities, it
did assert that the case was merely a dispute over ownership
of the option, and that interpreting § 10(b) to include such a
claim would convert every breach of contract that happened
to involve a security into a violation of the federal securities
laws. Id., at 596. We rejected that argument because the
purchaser’s claim was not that the defendant failed to carry
out a promise to sell securities; rather, the claim was that
the defendant sold a security while never intending to honor
its agreement in the first place. Id., at 596–597. Similarly,

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in this case the SEC claims respondent sold the Woods’ secu-
rities while secretly intending from the very beginning to
keep the proceeds. In Wharf, the fraudulent intent de-
prived the purchaser of the benefit of the sale whereas here
the fraudulent intent deprived the seller of that benefit, but
the connection between the deception and the sale in each
case is identical.
In United States v. O’Hagan, 521 U. S. 642 (1997), we held
that the defendant had committed fraud “in connection with”
a securities transaction when he used misappropriated con-
fidential information for trading purposes. We reasoned
that “the fiduciary’s fraud is consummated, not when the
fiduciary gains the confidential information, but when, with-
out disclosure to his principal, he uses the information to
purchase or sell securities. The securities transaction and
the breach of duty thus coincide. This is so even though
the person or entity defrauded is not the other party to the
trade, but is, instead, the source of the nonpublic informa-
tion.” Id., at 656. The Court of Appeals distinguished
O’Hagan by reading it to require that the misappropriated
information or assets not have independent value to the cli-
ent outside the securities market, 238 F. 3d, at 565. We do
not read O’Hagan as so limited. In the chief passage cited
by the Court of Appeals for this proposition, we discussed
the Government’s position that “[t]he misappropriation the-
ory would not . . . apply to a case in which a person defrauded
a bank into giving him a loan or embezzled cash from an-
other, and then used the proceeds of the misdeed to purchase
securities,” because in that situation “the proceeds would
have value to the malefactor apart from their use in a securi-
ties transaction, and the fraud would be complete as soon as
the money was obtained.” 521 U. S., at 656 (internal quota-
tion marks omitted). Even if this passage could be read to
introduce a new requirement into § 10(b), it would not affect
our analysis of this case, because the Woods’ securities did
not have value for respondent apart from their use in a secu-

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rities transaction and the fraud was not complete before the
sale of securities occurred.
As in Bankers Life, Wharf, and O’Hagan, the SEC com-
plaint describes a fraudulent scheme in which the securities
transactions and breaches of fiduciary duty coincide. Those
breaches were therefore “in connection with” securities sales
within the meaning of § 10(b).4 Accordingly, the judgment
of the Court of Appeals is reversed, and the case is remanded
for further proceedings consistent with this opinion.
It is so ordered.
4 Contrary to the Court of Appeals’ prediction, 238 F. 3d 559, 566 (CA4
2001), our analysis does not transform every breach of fiduciary duty into
a federal securities violation. If, for example, a broker embezzles cash
from a client’s account or takes advantage of the fiduciary relationship to
induce his client into a fraudulent real estate transaction, then the fraud
would not include the requisite connection to a purchase or sale of securi-
ties. Tr. of Oral Arg. 16. Likewise, if the broker told his client he was
stealing the client’s assets, that breach of fiduciary duty might be in con-
nection with a sale of securities, but it would not involve a deceptive
device or fraud. Cf. Santa Fe Industries, Inc. v. Green, 430 U. S. 462,
474–476 (1977).