Not all breaches of fiduciary duty in connection with a securities transaction come within the ambit of 17 C.F.R. § 240.10b-5. There must also be manipulation or deception. In an inside-trading case this fraud derives from the inherent unfairness involved where one takes advantage of information intended to be available only for a corporate purpose and not for the personal benefit of anyone. Thus, an insider will be liable under § 240.10b-5 for inside trading only where he fails to disclose material nonpublic information before trading on it and thus makes secret profits.
Petitioner, who was an officer of a broker-dealer firm, received information from insiders of a corporation that the corporation's assets were vastly overstated as a result of fraudulent corporate practices. Throughout his investigation, the officer openly discussed the information he had obtained with a number of clients and investors, some of which sold their holdings in the corporation in question. The officer also urged a newspaper to write a story on the allegations, but the newspaper refused. The New York Stock Exchange later halted trading on the corporation's stock after the stock fell from $ 26 to $ 15. Thereafter, California insurance authorities impounded the corporation's records and uncovered evidence of fraud. The Securities and Exchange Commission (SEC) filed a complaint against the corporation. The SEC also began an investigation of the officer's role in the exposure of the fraud, and after a hearing, found that the officer had aided and abetted violations of section 17(a) of the Securities Act of 1933, section 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 the corporation's stock. The SEC concluded that 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. Recognizing, however, the officer's role in bringing the corporation's fraud to light, the SEC only censured him. On appeal, the United States Court of Appeals for the District of Columbia Circuit entered judgment against the officer for the reasons stated by the SEC in its opinion. Petitioner officer sought the review by the Supreme Court of the United States.
Where an officer of a broker-dealer firm received and disclosed material nonpublic information from "insiders" of a corporation with which he had no connection, did he violate the antifraud provisions of the federal securities laws by the disclosure?
The Supreme Court of the United States held that the petitioner officer did not violate the anti-fraud provisions of the federal securities laws. The officer had no pre-existing fiduciary duty to the corporation's shareholders, took no action inducing the shareholders to repose trust in him, and did not misappropriate or illegally obtain the information. The insiders did not violate their fiduciary duty to the shareholders by providing the information so as to create a derivative fiduciary duty on the part of the officer, the insiders having received no monetary or personal benefit for revealing the information, but only being motivated by a desire to expose fraud. The Court held that there was no actionable insider-trading violation by petitioner where petitioner was a stranger to the corporation, had no fiduciary duty to corporation's shareholders, did not try to gain corporate shareholder's confidence, and did not illegally obtain the information about the corporation. Therefore, petitioner had no duty to abstain from the use of the inside information. Accordingly, the lower court's judgment was reversed.