Law School Case Brief
Chiarella v. United States - 445 U.S. 222, 100 S. Ct. 1108 (1980)
Silence in connection with the purchase or sale of securities may operate as a fraud actionable under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j, despite the absence of statutory language or legislative history specifically addressing the legality of nondisclosure. But such liability is premised upon a duty to disclose arising from a relationship of trust and confidence between parties to a transaction. Application of a duty to disclose prior to trading guarantees that corporate insiders, who have an obligation to place the shareholder's welfare before their own, will not benefit personally through fraudulent use of material, nonpublic information.
An individual employed as a "markup man" by a financial printer handling corporate takeover bids was able to deduce the identities of both the acquiring companies and the companies which were targeted for takeover, notwithstanding the measures which had been taken to keep such information secret until just prior to publication. Without disclosing his knowledge about the prospective takeover bids, the employee purchased stock in the target companies and then sold his purchased shares for a profit immediately after the takeover attempts were made public. Following an investigation of the employee's stock trading activities by the Securities and Exchange Commission, the employee entered into a consent decree in which he agreed to return the profits he had made as a result of his activities. Thereafter he was also indicted and convicted at a jury trial in the United States District Court for the Southern District of New York under 32(a) of the Securities Exchange Act of 1934, making it a crime to willfully violate the Act, for his having violated 10(b) of the Act (15 USCS 78j(b)), which prohibits the use "in connection with the purchase or sale of any security … [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe," and for violation of the provisions of the Commission's Rule 10b-5 making it unlawful to employ "any device, scheme, or artifice to defraud" or to engage in any act operating "as a fraud or a deceit," the District Court's charge to the jury having permitted the jury to convict if it found that the employee had willfully failed to inform the sellers of target company stock that he knew of forthcoming takeover bids that would make their stock more valuable. On appeal, the United States Court of Appeals for the Second Circuit affirmed the conviction, holding that anyone -- corporate insider or not -- who regularly receives material nonpublic information may not use that information to trade in securities without incurring an affirmative duty to disclose
Was the printer's conviction under § 10(b) proper?
The United States Supreme Court reversed. The Court held that petitioner had not violated the duty to disclose material information where no relationship of trust or confidence existed between petitioner and the shareholders. While noting that silence in connection with the purchase or sale of securities could have been fraud under § 10(b), the Court held that petitioner had not violated § 10(b) where he was under no affirmative duty to disclose the information before trading. Because petitioner was not an agent or fiduciary of the sellers, the Court found that he had no duty to the sellers.
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