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. 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.
While working for a financial printer, petitioner handled announcements of corporate takeover bids. Without disclosing his knowledge, a the printer purchasd the targeted companies stock, selling the shares immediately after the takeover attempts were made public. He was indicted and convicted of violating § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j, and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. Petitioner appealed the decision.
Did petitioner's failure to disclose non-public market information prior to trading make him liable for fraud?
Reversing petitioner's conviction, 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.