Dirks v. SEC

463 U.S. 646, 103 S. Ct. 3255 (1983)

 

RULE:

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. 

FACTS:

Petitioner was an officer of a broker-dealer firm and specialized in investment analysis of insurance company securities to investors. Petitioner received information that a corporation had vastly overstated assets. Petitioner discussed this information with clients, and some of those clients sold holdings in the corporation. When respondent corporation learned of petitioner's actions, respondent found that petitioner aided and abetted violations of § 17(a) of the Securities Act of 1933, and § 10(b) of the Securities Exchange Act of 1934 by repeating the allegations to members of the investment community. In a divided opinion, the appellate court found against petitioner and he sought the Court's review. On certiorari, the United States Supreme Court reversed.

ISSUE:

Did petitioner violate federal securities laws by repeating allegations of respondent corporation's fraud to investors?

ANSWER:

No.

CONCLUSION:

The U.S. Supreme Court held 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, and the lower court's judgment was reversed.

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