Dirks v. Securities and Exchange Commission
| Citation | 463 U.S. 646,103 S.Ct. 3255,77 L.Ed.2d 911 |
| Decision Date | 01 July 1983 |
| Docket Number | No. 82-276,82-276 |
| Parties | Raymond L. DIRKS, Petitioner v. SECURITIES AND EXCHANGE COMMISSION |
| Court | United States Supreme Court |
While serving as an officer of a broker-dealer, petitioner, who specialized in providing investment analysis of insurance company securities to institutional investors, received information from a former officer of an insurance company that its assets were vastly overstated as the result of fraudulent corporate practices and that various regulatory agencies had failed to act on similar charges made by company employees. Upon petitioner's investigation of the allegations, certain company employees corroborated the fraud charges, but senior management denied any wrongdoing. Neither petitioner nor his firm owned or traded any of the company's stock, but throughout his investigation he openly discussed the nformation he had obtained with a number of clients and investors, some of whom sold their holdings in the company. The Wall Street Journal declined to publish a story on the fraud allegations, as urged by petitioner. After the price of the insurance company's stock fell during petitioner's investigation, the New York Stock Exchange halted trading in the stock. State insurance authorities then impounded the company's records and uncovered evidence of fraud. Only then did the Securities and Exchange Commission (SEC) file a complaint against the company, and only then did the Wall Street Journal publish a story based largely on information assembled by petitioner. After a hearing concerning petitioner's role in the exposure of the fraud, the SEC found that he had aided and abetted violations of the antifraud provisions of the federal securities laws, including § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, by repeating the allegations of fraud to members of the investment community who later sold their stock in the insurance company. Because of petitioner's role in bringing the fraud to light, however, the SEC only censured him. On review, the Court of Appeals entered judgment against petitioner.
Held:
1. Two elements for establishing a violation of § 10(b) and Rule 10b-5 by corporate insiders are the existence of a relationship affording access to inside information intended to be available only for a corporate purpose, and the unfairness of allowing a corporate insider to take advan- tage of that information by trading without disclosure. A duty to disclose or abstain does not arise from the mere possession of nonpublic market information. Such a duty arises rather from the existence of a fiduciary relationship. Chiarella v. United States, 445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348. There must also be "manipulation or deception" to bring a breach of fiduciary duty in connection with a securities transaction within the ambit of Rule 10b-5. Thus, an insider is liable under the Rule for inside trading only where he fails to disclose material nonpublic information before trading on it and thus makes secret profits. Pp. 653-654.
2. Unlike insiders who have independent fiduciary duties to both the corporation and its shareholders, the typical tippee has no such relationships. There must be a breach of the insider's fiduciary duty before the tippee inherits the duty to disclose or abstain. Pp. 654-664.
(a) The SEC's position that a tippee who knowingly receives nonpublic material information from an insider invariably has a fiduciary duty to disclose before trading rests on the erroneous theory that the antifraud provisions require equal information among all traders. A duty to disclose arises from the relationship between parties and not merely from one's ability to acquire information because of his position in the market. Pp. 655-659.
(b) A tippee, however, is not always free to trade on inside information. His duty to disclose or abstain is derivative from that of the insider's duty. Tippees must assume an insider's duty to the shareholders not because they receive inside information, but rather because it has been made available to them improperly. Thus, a tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic information only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach. Pp. 659-661.
(c) In determining whether a tippee is under an obligation to disclose or abstain, it is necessary to determine whether the insider's "tip" constituted a breach of the insider's fiduciary duty. Whether disclosure is a breach of duty depends in large part on the personal benefit the insider receives as a result of the disclosure. Absent an improper purpose, there is no breach of duty to stockholders. And absent a breach by the insider, there is no derivative breach. Pp. 661-664.
3. Under the inside-trading and tipping rules set forth above, petitioner had no duty to abstain from use of the inside information that he obtained, and thus there was no actionable violation by him. He had no pre-existing fiduciary duty to the insurance company's shareholders. Moreover, the insurance company's employees, as insiders, did not vio- late their duty to the company's shareholders by providing information to petitioner. In the absence of a breach of duty to shareholders by the insiders, there was no derivative breach by petitioner. Pp. 665-667.
220 U.S.App.D.C. 309, 681 F.2d 824 (1982), reversed.
David Bonderman, Washington, D.C., for petitioner.
Paul Gonson, Washington, D.C., for respondent.
Petitioner Raymond Dirks received material nonpublic information from "insiders" of a corporation with which he had no connection. He disclosed this information to investors who relied on it in trading in the shares of the corporation. The question is whether Dirks violated the antifraud provisions of the federal securities laws by this disclosure.
In 1973, Dirks was an officer of a New York broker-dealer firm who specialized in providing investment analysis of insurance company securities to institutional investors.1 On March 6, Dirks received information from Ronald Secrist, a former officer of Equity Funding of America. Secrist alleged that the assets of Equity Funding, a diversified corporation primarily engaged in selling life insurance and mutual funds, were vastly overstated as the result of fraudulent corporate practices. Secrist also stated that various regulatory agencies had failed to act on similar charges made by Equity Funding employees. He urged Dirks to verify the fraud and disclose it publicly.
Dirks decided to investigate the allegations. He visited Equity Funding's headquarters in Los Angeles and interviewed several officers and employees of the corporation. The senior management denied any wrongdoing, but certain corporation employees corroborated the charges of fraud. Neither Dirks nor his firm owned or traded any Equity Funding stock, but throughout his investigation he openly discussed the information he had obtained with a number of clients and investors. Some of these persons sold their holdings of Equity Funding securities, including five investment advisers who liquidated holdings of more than $16 million.2
While Dirks was in Los Angeles, he was in touch regularly with William Blundell, the Wall Street Journal's Los Angeles bureau chief. Dirks urged Blundell to write a story on the fraud allegations. Blundell did not believe, however, that such a massive fraud could go undetected and declined to write the story. He feared that publishin such damaging hearsay might be libelous.
During the two-week period in which Dirks pursued his investigation and spread word of Secrist's charges, the price of Equity Funding stock fell from $26 per share to less than $15 per share. This led the New York Stock Exchange to halt trading on March 27. Shortly thereafter California insurance authorities impounded Equity Funding's records and uncovered evidence of the fraud. Only then did the Securities and Exchange Commission (SEC) file a complaint against Equity Funding 3 and only then, on April 2, did the Wall Street Journal publish a front-page story based largely on information assembled by Dirks. Equity Funding immediately went into receivership.4
The SEC began an investigation into Dirks' role in the exposure of the fraud. After a hearing by an administrative law judge, the SEC found that Dirks had aided and abetted violations of § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a),5 § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b),6 and SEC Rule 10b-5, 17 CFR § 240.10b-5 (1982),7 by repeating the allegations of fraud to members of the investment community who later sold their Equity Funding stock. The SEC concluded: "Where 'tippees'—regardless of their motivation or occupation—come into possession of material 'information that they know is confidential and know or should know came from a corporate insider,' they must either publicly disclose that information or refrain from trading." 21 S.E.C. Docket 1401, 1407 (1981) (footnote omitted) (quoting Chiarella v. United States, 445 U.S. 222, 230 n. 12, 100 S.Ct. 1108, 1115 n. 12, 63 L.Ed.2d 348 (1980)). Recognizing, however, that Dirks "played an important role in bringing [Equity Funding's] massive fraud to light," 21 S.E.C. Docket, at 1412,8 the SEC only censured him.9
Dirks sought review in the Court of Appeals for the District of Columbia Circuit. The court entered judgment against Dirks "for the reasons stated by the Commission in its opinion." App. to Pet. for Cert. C-2. Judge Wright, a member of the panel, subsequently issued an opinion. Judge Robb concurred in the result and Judge Tamm dissented; neither filed a separate opinion. Judge Wright believed that "the obligations of corporate fiduciaries pass to all those to...
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