BU Business Law The United States Versus O Hagan Essay

445 U.S. 222 (1980)
CHIARELLA
v.
UNITED STATES.
No. 78-1202.
Supreme Court of United States.
Argued November 5, 1979.
Decided March 18, 1980.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND
CIRCUIT.
223*223 Stanley S. Arkin argued the cause for petitioner. With him on the briefs were Mark S.
Arisohn and Arthur T. Cambouris.
Stephen M. Shapiro argued the cause for the United States. With him on the brief were Solicitor
General McCree, Assistant Attorney General Heymann, Deputy Solicitor General Geller, Sara
Criscitelli, John S. Siffert, Ralph C. Ferrara, and Paul Gonson.[*]
224*224 MR. JUSTICE POWELL delivered the opinion of the Court.
The question in this case is whether a person who learns from the confidential documents of one
corporation that it is planning an attempt to secure control of a second corporation violates § 10
(b) of the Securities Exchange Act of 1934 if he fails to disclose the impending takeover before
trading in the target company’s securities.
I
Petitioner is a printer by trade. In 1975 and 1976, he worked as a “markup man” in the New York
composing room of Pandick Press, a financial printer. Among documents that petitioner handled
were five announcements of corporate takeover bids. When these documents were delivered to
the printer, the identities of the acquiring and target corporations were concealed by blank spaces
or false names. The true names were sent to the printer on the night of the final printing.
The petitioner, however, was able to deduce the names of the target companies before the final
printing from other information contained in the documents. Without disclosing his knowledge,
petitioner purchased stock in the target companies and sold the shares immediately after the
takeover attempts were made public.[1] By this method, petitioner realized a gain of slightly more
than $30,000 in the course of 14 months. Subsequently, the Securities and Exchange
Commission (Commission or SEC) began an investigation of his trading activities. In May 1977,
petitioner entered into a consent decree with the Commission in which he agreed to return his
profits to the sellers of the shares.[2] On the same day, he was discharged by Pandick Press.
225*225 In January 1978, petitioner was indicted on 17 counts of violating § 10 (b) of the
Securities Exchange Act of 1934 (1934 Act) and SEC Rule 10b-5.[3] After petitioner
unsuccessfully moved to dismiss the indictment,[4] he was brought to trial and convicted on all
counts.
The Court of Appeals for the Second Circuit affirmed petitioner’s conviction. 588 F. 2d 1358
(1978). We granted certiorari, 441 U. S. 942 (1979), and we now reverse.
II
Section 10 (b) of the 1934 Act, 48 Stat. 891, 15 U. S. C. § 78j, 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.”
Pursuant to this section, the SEC promulgated Rule 10b-5 which provides in pertinent part:[5]
“It shall be unlawful for any person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce, or of the mails or of any facility of any national securities
exchange,
226*226 “(a) To employ any device, scheme, or artifice to defraud, [or]
…..
“(c) To engage in any act, practice, or course of business which operates or would operate as a
fraud or deceit upon any person, in connection with the purchase or sale of any security.” 17
CFR § 240.10b-5 (1979).
This case concerns the legal effect of the petitioner’s silence. The District Court’s charge
permitted the jury to convict the petitioner if it found that he willfully failed to inform sellers of
target company securities that he knew of a forthcoming takeover bid that would make their
shares more valuable.[6] In order to decide whether silence in such circumstances violates § 10
(b), it is necessary to review the language and legislative history of that statute as well as its
interpretation by the Commission and the federal courts.
Although the starting point of our inquiry is the language of the statute, Ernst & Ernst v.
Hochfelder, 425 U. S. 185, 197 (1976), § 10 (b) does not state whether silence may constitute a
manipulative or deceptive device. Section 10 (b) was designed as a catchall clause to prevent
fraudulent practices. 425 U. S., at 202, 206. But neither the legislative history nor the statute
itself affords specific guidance for the resolution of this case. When Rule 10b-5 was promulgated
in 1942, the SEC did not discuss the possibility that failure to provide information might run
afoul of § 10 (b).[7]
The SEC took an important step in the development of § 10 (b) when it held that a broker-dealer
and his firm violated that section by selling securities on the basis of undisclosed information
obtained from a director of the issuer corporation who was also a registered representative of the
brokerage firm. In Cady, Roberts & Co., 40 S. E. C. 907 227*227 (1961), the Commission
decided that a corporate insider must abstain from trading in the shares of his corporation unless
he has first disclosed all material inside information known to him. The obligation to disclose or
abstain derives from
“[a]n affirmative duty to disclose material information[, which] has been traditionally imposed
on corporate `insiders,’ particularly officers, directors, or controlling stockholders. We, and the
courts have consistently held that insiders must disclose material facts which are known to them
by virtue of their position but which are not known to persons with whom they deal and which, if
known, would affect their investment judgment.” Id., at 911.
The Commission emphasized that the duty arose from (i) the existence of a relationship affording
access to inside information intended to be available only for a corporate purpose, and (ii) the
unfairness of allowing a corporate insider to take advantage of that information by trading
without disclosure. Id., at 912, and n. 15.[8]
That the relationship between a corporate insider and the stockholders of his corporation gives
rise to a disclosure obligation is not a novel twist of the law. At common law, misrepresentation
made for the purpose of inducing reliance 228*228 upon the false statement is fraudulent. But
one who fails to disclose material information prior to the consummation of a transaction
commits fraud only when he is under a duty to do so. And the duty to disclose arises when one
party has information “that the other [party] is entitled to know because of a fiduciary or other
similar relation of trust and confidence between them.”[9] In its Cady, Roberts decision, the
Commission recognized a relationship of trust and confidence between the shareholders of a
corporation and those insiders who have obtained confidential information by reason of their
position with that corporation.[10] This relationship gives rise to a duty to disclose because of the
“necessity of preventing a corporate insider from . . . tak[ing] unfair advantage of the 229*229
uninformed minority stockholders.” Speed v. Transamerica Corp., 99 F. Supp. 808, 829 (Del.
1951).
The federal courts have found violations of § 10 (b) where corporate insiders used undisclosed
information for their own benefit. E. g., SEC v. Texas Gulf Sulphur Co., 401 F. 2d 833 (CA2
1968), cert. denied, 404 U. S. 1005 (1971). The cases also have emphasized, in accordance with
the common-law rule, that “[t]he party charged with failing to disclose market information must
be under a duty to disclose it.” Frigitemp Corp. v. Financial Dynamics Fund, Inc., 524 F. 2d
275, 282 (CA2 1975). Accordingly, a purchaser of stock who has no duty to a prospective seller
because he is neither an insider nor a fiduciary has been held to have no obligation to reveal
material facts. See General Time Corp. v. Talley Industries, Inc., 403 F. 2d 159, 164 (CA2
1968), cert. denied, 393 U. S. 1026 (1969).[11]
This Court followed the same approach in Affiliated Ute Citizens v. United States, 406 U. S. 128
(1972). A group of American Indians formed a corporation to manage joint assets derived from
tribal holdings. The corporation issued stock to its Indian shareholders and designated a local
bank as its transfer agent. Because of the speculative nature of the corporate assets and the
difficulty of ascertaining the true value of a share, the corporation requested the bank to stress to
its stockholders the importance of retaining the stock. Id., at 146. Two of the bank’s assistant
managers aided the shareholders in disposing of stock which the managers knew was traded in
two separate markets—a primary market of 230*230 Indians selling to non-Indians through the
bank and a resale market consisting entirely of non-Indians. Indian sellers charged that the
assistant managers had violated § 10 (b) and Rule 10b-5 by failing to inform them of the higher
prices prevailing in the resale market. The Court recognized that no duty of disclosure would
exist if the bank merely had acted as a transfer agent. But the bank also had assumed a duty to
act on behalf of the shareholders, and the Indian sellers had relied upon its personnel when they
sold their stock. 406 U. S., at 152. Because these officers of the bank were charged with a
responsibility to the shareholders, they could not act as market makers inducing the Indians to
sell their stock without disclosing the existence of the more favorable non-Indian market. Id., at
152-153.
Thus, administrative and judicial interpretations have established that silence in connection with
the purchase or sale of securities may operate as a fraud actionable under § 10 (b) 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.[12]
231*231 III
In this case, the petitioner was convicted of violating § 10 (b) although he was not a corporate
insider and he received no confidential information from the target company. Moreover, the
“market information” upon which he relied did not concern the earning power or operations of
the target company, but only the plans of the acquiring company.[13] Petitioner’s use of that
information was not a fraud under § 10 (b) unless he was subject to an affirmative duty to
disclose it before trading. In this case, the jury instructions failed to specify any such duty. In
effect, the trial court instructed the jury that petitioner owed a duty to everyone; to all sellers,
indeed, to the market as a whole. The jury simply was told to decide whether petitioner used
material, nonpublic information at a time when “he knew other people trading in the securities
market did not have access to the same information.” Record 677.
The Court of Appeals affirmed the conviction by holding that “[a]nyone—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.” 588 F. 2d, at 1365
(emphasis in original). Although the court said that its test would include only persons who
regularly receive material, nonpublic information, id., at 1366, its rationale for that limitation is
unrelated to the existence of a duty to disclose.[14] The Court of 232*232 Appeals, like the trial
court, failed to identify a relationship between petitioner and the sellers that could give rise to a
duty. Its decision thus rested solely upon its belief that the federal securities laws have “created a
system providing equal access to information necessary for reasoned and intelligent investment
decisions.” Id., at 1362. The use by anyone of material information not generally available is
fraudulent, this theory suggests, because such information gives certain buyers or sellers an
unfair advantage over less informed buyers and sellers.
This reasoning suffers from two defects. First, not every instance of financial unfairness
constitutes fraudulent activity under § 10 (b). See Santa Fe Industries, Inc. v. Green, 430 U. S.
462, 474-477 (1977). Second, the element required to make silence fraudulent—a duty to
disclose—is absent in this case. No duty could arise from petitioner’s relationship with the sellers
of the target company’s securities, for petitioner had no prior dealings with them. He was not
their agent, he was not a fiduciary, he was not a person in whom the sellers had placed their trust
and confidence. He was, in fact, a complete 233*233 stranger who dealt with the sellers only
through impersonal market transactions.
We cannot affirm petitioner’s conviction without recognizing a general duty between all
participants in market transactions to forgo actions based on material, nonpublic information.
Formulation of such a broad duty, which departs radically from the established doctrine that duty
arises from a specific relationship between two parties, see n. 9, supra, should not be undertaken
absent some explicit evidence of congressional intent.
As we have seen, no such evidence emerges from the language or legislative history of § 10 (b).
Moreover, neither the Congress nor the Commission ever has adopted a parity-of-information
rule. Instead the problems caused by misuse of market information have been addressed by
detailed and sophisticated regulation that recognizes when use of market information may not
harm operation of the securities markets. For example, the Williams Act[15] limits but does not
completely prohibit a tender offeror’s purchases of target corporation stock before public
announcement of the offer. Congress’ careful action in this and other areas[16] contrasts, and
234*234 is in some tension, with the broad rule of liability we are asked to adopt in this case.
Indeed, the theory upon which the petitioner was convicted is at odds with the Commission’s
view of § 10 (b) as applied to activity that has the same effect on sellers as the petitioner’s
purchases. “Warehousing” takes place when a corporation gives advance notice of its intention to
launch a tender offer to institutional investors who then are able to purchase stock in the target
company before the tender offer is made public and the price of shares rises.[17] In this case, as in
warehousing, a buyer of securities purchases stock in a target corporation on the basis of market
information which is unknown to the seller. In both of these situations, the seller’s behavior
presumably would be altered if he had the nonpublic information. Significantly, however, the
Commission has acted to bar warehousing under its authority to regulate tender offers[18] after
recognizing that action under § 10 (b) would rest on a “somewhat different theory” than that
previously used to regulate insider trading as fraudulent activity.[19]
We see no basis for applying such a new and different theory of liability in this case. As we have
emphasized before, the 1934 Act cannot be read “`more broadly than its language and the
statutory scheme reasonably permit.'” Touche Ross & Co. v. Redington, 442 U. S. 560, 578
(1979), quoting SEC v. Sloan, 436 U. S. 103, 116 (1978). Section 10 (b) is aptly 235*235
described as a catchall provision, but what it catches must be fraud. When an allegation of fraud
is based upon nondisclosure, there can be no fraud absent a duty to speak. We hold that a duty to
disclose under § 10 (b) does not arise from the mere possession of nonpublic market information.
The contrary result is without support in the legislative history of § 10 (b) and would be
inconsistent with the careful plan that Congress has enacted for regulation of the securities
markets. Cf. Santa Fe Industries, Inc. v. Green, 430 U. S., at 479.[20]
IV
In its brief to this Court, the United States offers an alternative theory to support petitioner’s
conviction. It argues that petitioner breached a duty to the acquiring corporation when he acted
upon information that he obtained by virtue of his position as an employee of a printer employed
by the corporation. The breach of this duty is said to support a 236*236 conviction under § 10
(b) for fraud perpetrated upon both the acquiring corporation and the sellers.
We need not decide whether this theory has merit for it was not submitted to the jury. The jury
was told, in the language of Rule 10b-5, that it could convict the petitioner if it concluded that he
either (i) employed a device, scheme, or artifice to defraud or (ii) engaged in an act, practice, or
course of business which operated or would operate as a fraud or deceit upon any person. Record
681. The trial judge stated that a “scheme to defraud” is a plan to obtain money by trick or deceit
and that “a failure by Chiarella to disclose material, non-public information in connection with
his purchase of stock would constitute deceit.” Id., at 683. Accordingly, the jury was instructed
that the petitioner employed a scheme to defraud if he “did not disclose . . . material nonpublic
information in connection with the purchases of the stock.” Id., at 685-686.
Alternatively, the jury was instructed that it could convict if “Chiarella’s alleged conduct of
having purchased securities without disclosing material, non-public information would have or
did have the effect of operating as a fraud upon a seller.” Id., at 686. The judge earlier had stated
that fraud “embraces all the means which human ingenuity can devise and which are resorted to
by one individual to gain an advantage over another by false misrepresentation, suggestions or
by suppression of the truth.” Id., at 683.
The jury instructions demonstrate that petitioner was convicted merely because of his failure to
disclose material, non-public information to sellers from whom he bought the stock of target
corporations. The jury was not instructed on the nature or elements of a duty owed by petitioner
to anyone other than the sellers. Because we cannot affirm a criminal conviction on the basis of a
theory not presented to the jury, Rewis v. United States, 401 U. S. 808, 814 (1971), see Dunn v.
United States, 442 U. S. 100, 106 (1979), we will not speculate upon whether such a duty exists,
whether it has been 237*237 breached or whether such a breach constitutes a violation of § 10
(b).[21]
The judgment of the Court of Appeals is
Reversed.
MR. JUSTICE STEVENS, concurring.
Before liability, civil or criminal, may be imposed for a Rule 10b-5 violation, it is necessary to
identify the duty that the defendant has breached. Arguably, when petitioner bought securities in
the open market, he violated (a) a duty to disclose owed to the sellers from whom he purchased
target company stock and (b) a duty of silence owed to the acquiring companies. I agree with the
Court’s determination that petitioner owed no duty of disclosure to the sellers, that his conviction
rested on the erroneous premise that he did owe them such a duty, and that the judgment of the
Court of Appeals must therefore be reversed.
238*238 The Court correctly does not address the second question: whether the petitioner’s
breach of his duty of silence—a duty he unquestionably owed to his employer and to his
employer’s customers—could give rise to criminal liability under Rule 10b-5. Respectable
arguments could be made in support of either position. On the one hand, if we assume that
petitioner breached a duty to the acquiring companies that had entrusted confidential information
to his employers, a legitimate argument could be made that his actions constituted “a fraud or a
deceit” upon those companies “in connection with the purchase or sale of any security.”[*] On the
other hand, inasmuch as those companies would not be able to recover damages from petitioner
for violating Rule 10b-5 because they were neither purchasers nor sellers of target company
securities, see Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723, it could also be argued
that no actionable violation of Rule 10b-5 had occurred. I think the Court wisely leaves the
resolution of this issue for another day.
I write simply to emphasize the fact that we have not necessarily placed any stamp of approval
on what this petitioner did, nor have we held that similar actions must be considered lawful in the
future. Rather, we have merely held that petitioner’s criminal conviction cannot rest on the theory
that he breached a duty he did not owe.
I join the Court’s opinion.
MR. JUSTICE BRENNAN, concurring in the judgment.
The Court holds, correctly in my view, that “a duty to disclose under § 10 (b) does not arise from
the mere possession 239*239 of nonpublic market information.” Ante, at 235. Prior to so
holding, however, it suggests that no violation of § 10 (b) could be made out absent a breach of
some duty arising out of a fiduciary relationship between buyer and seller. I cannot subscribe to
that suggestion. On the contrary, it seems to me that Part I of THE CHIEF JUSTICE’s dissent,
post, at 239-243, correctly states the applicable substantive law—a person violates § 10 (b)
whenever he improperly obtains or converts to his own benefit nonpublic information which he
then uses in connection with the purchase or sale of securities.
While I agree with Part I of THE CHIEF JUSTICE’s dissent, I am unable to agree with Part II.
Rather, I concur in the judgment of the majority because I think it clear that the legal theory
sketched by THE CHIEF JUSTICE is not the one presented to the jury. As I read them, the
instructions in effect permitted the jurors to return a verdict of guilty merely upon a finding of
failure to disclose material, nonpublic information in connection with the purchase of stock. I can
find no instruction suggesting that one element of the offense was the improper conversion or
misappropriation of that nonpublic information. Ambiguous suggestions in the indictment and
the prosecutor’s opening and closing remarks are no substitute for the proper instructions. And
neither reference to the harmless-error doctrine nor some post hoc theory of constructive
stipulation can cure the defect. The simple fact is that to affirm the conviction without an
adequate instruction would be tantamount to directing a verdict of guilty, and that we plainly
may not do.
MR. CHIEF JUSTICE BURGER, dissenting.
I believe that the jury instructions in this case properly charged a violation of § 10 (b) and Rule
10b-5, and I would affirm the conviction.
I
As a general rule, neither party to an arm’s-length business transaction has an obligation to
disclose information to the 240*240 other unless the parties stand in some confidential or
fiduciary relation. See W. Prosser, Law of Torts § 106 (2d ed. 1955). This rule permits a
businessman to capitalize on his experience and skill in securing and evaluating relevant
information; it provides incentive for hard work, careful analysis, and astute forecasting. But the
policies that underlie the rule also should limit its scope. In particular, the rule should give way
when an informational advantage is obtained, not by superior experience, foresight, or industry,
but by some unlawful means. One commentator has written:
“[T]he way in which the buyer acquires the information which he conceals from the vendor
should be a material circumstance. The information might have been acquired as the result of his
bringing to bear a superior knowledge, intelligence, skill or technical judgment; it might have
been acquired by mere chance; or it might have been acquired by means of some tortious action
on his part. . . . Any time information is acquired by an illegal act it would seem that there should
be a duty to disclose that information.” Keeton, Fraud—Concealment and Non-Disclosure, 15
Texas L. Rev. 1, 25-26 (1936) (emphasis added).
I would read § 10 (b) and Rule 10b-5 to encompass and build on this principle: to mean that a
person who has misappropriated nonpublic information has an absolute duty to disclose that
information or to refrain from trading.
The language of § 10 (b) and of Rule 10b-5 plainly supports such a reading. By their terms, these
provisions reach any person engaged in any fraudulent scheme. This broad language negates the
suggestion that congressional concern was limited to trading by “corporate insiders” or to
deceptive practices related to “corporate information.”[1] Just as surely 241*241 Congress cannot
have intended one standard of fair dealing for “white collar” insiders and another for the “blue
collar” level. The very language of § 10 (b) and Rule 10b-5 “by repeated use of the word `any’
[was] obviously meant to be inclusive.” Affiliated Ute Citizens v. United States, 406 U. S. 128,
151 (1972).
The history of the statute and of the Rule also supports this reading. The antifraud provisions
were designed in large measure “to assure that dealing in securities is fair and without undue
preferences or advantages among investors.” H. R. Conf. Rep. No. 94-229, p. 91 (1975). These
provisions prohibit “those manipulative and deceptive practices which have been demonstrated
to fulfill no useful function.” S. Rep. No. 792, 73d Cong., 2d Sess., 6 (1934). An investor who
purchases securities on the basis of misappropriated nonpublic information possesses just such
an “undue” trading advantage; his conduct quite clearly serves no useful function except his own
enrichment at the expense of others.
This interpretation of § 10 (b) and Rule 10b-5 is in no sense novel. It follows naturally from legal
principles enunciated by the Securities and Exchange Commission in its seminal Cady, Roberts
decision. 40 S. E. C. 907 (1961). There, the Commission relied upon two factors to impose a
duty to disclose on corporate insiders: (1) “. . . access . . . to information intended to be available
only for a corporate purpose and not for the personal benefit of anyone” (emphasis added); and
(2) the unfairness inherent in trading on such information when it is inaccessible to those with
whom one is dealing. Both of these factors are present whenever a party gains an 242*242
informational advantage by unlawful means.[2] Indeed, in In re Blyth & Co., 43 S. E. C. 1037
(1969), the Commission applied its Cady, Roberts decision in just such a context. In that case a
broker-dealer had traded in Government securities on the basis of confidential Treasury
Department information which it received from a Federal Reserve Bank employee. The
Commission ruled that the trading was “improper use of inside information” in violation of § 10
(b) and Rule 10b-5. 43 S. E. C., at 1040. It did not hesitate to extend Cady, Roberts to reach a
“tippee” of a Government insider.[3]
Finally, it bears emphasis that this reading of § 10b and Rule 10b-5 would not threaten legitimate
business practices. So read, the antifraud provisions would not impose a duty on a tender offeror
to disclose its acquisition plans during the period in which it “tests the water” prior to purchasing
a full 5% of the target company’s stock. Nor would it proscribe “warehousing.” See generally
SEC, Institutional Investor Study Report, H. R. Doc. No. 92-64, pt. 4, p. 2273 (1971). Likewise,
market specialists would not be subject to a disclose-or-refrain requirement in the performance
of their everyday 243*243 market functions. In each of these instances, trading is accomplished
on the basis of material, nonpublic information, but the information has not been unlawfully
converted for personal gain.
II
The Court’s opinion, as I read it, leaves open the question whether § 10 (b) and Rule 10b-5
prohibit trading on misappropriated nonpublic information.[4] Instead, the Court apparently
concludes that this theory of the case was not submitted to the jury. In the Court’s view, the
instructions given the jury were premised on the erroneous notion that the mere failure to
disclose nonpublic information, however acquired, is a deceptive practice. And because of this
premise, the jury was not instructed that the means by which Chiarella acquired his informational
advantage—by violating a duty owed to the acquiring companies—was an element of the
offense. See ante, at 236.
The Court’s reading of the District Court’s charge is unduly restrictive. Fairly read as a whole and
in the context of the trial, the instructions required the jury to find that Chiarella obtained his
trading advantage by misappropriating the property of his employer’s customers. The jury was
charged that “[i]n simple terms, the charge is that Chiarella wrongfully took advantage of
information he acquired in the course of his confidential position at Pandick Press and secretly
used that information when he knew other people trading in the securities market did not have
access to the same information 244*244 that he had at a time when he knew that that information
was material to the value of the stock.” Record 677 (emphasis added). The language parallels
that in the indictment, and the jury had that indictment during its deliberations; it charged that
Chiarella had traded “without disclosing the material non-public information he had obtained in
connection with his employment.” It is underscored by the clarity which the prosecutor exhibited
in his opening statement to the jury. No juror could possibly have failed to understand what the
case was about after the prosecutor said: “In sum what the indictment charges is that Chiarella
misused material non-public information for personal gain and that he took unfair advantage of
his position of trust with the full knowledge that it was wrong to do so. That is what the case is
about. It is that simple.” Id., at 46. Moreover, experienced defense counsel took no exception and
uttered no complaint that the instructions were inadequate in this regard.
In any event, even assuming the instructions were deficient in not charging misappropriation
with sufficient precision, on this record any error was harmless beyond a reasonable doubt. Here,
Chiarella, himself, testified that he obtained his informational advantage by decoding
confidential material entrusted to his employer by its customers. Id., at 474-475. He admitted that
the information he traded on was “confidential,” not “to be use[d] . . . for personal gain.” Id., at
496. In light of this testimony, it is simply inconceivable to me that any shortcoming in the
instructions could have “possibly influenced the jury adversely to [the defendant].” Chapman v.
California, 386 U. S. 18, 23 (1967). See also United States v. Park, 421 U. S. 658, 673-676
(1975). Even more telling perhaps is Chiarella’s counsel’s statement in closing argument:
“Let me say right up front, too, Mr. Chiarella got on the stand and he conceded, he said candidly,
`I used clues I got while I was at work. I looked at these various documents 245*245 and I
deciphered them and I decoded them and I used that information as a basis for purchasing stock.’
There is no question about that. We don’t have to go through a hullabaloo about that. It is
something he concedes. There is no mystery about that.” Record 621.
In this Court, counsel similarly conceded that “[w]e do not dispute the proposition that Chiarella
violated his duty as an agent of the offeror corporations not to use their confidential information
for personal profit.” Reply Brief for Petitioner 4 (emphasis added). See Restatement (Second) of
Agency § 395 (1958). These statements are tantamount to a formal stipulation that Chiarella’s
informational advantage was unlawfully obtained. And it is established law that a stipulation
related to an essential element of a crime must be regarded by the jury as a fact conclusively
proved. See 8 J. Wigmore, Evidence § 2590 (McNaughton rev. 1961); United States v. Houston,
547 F. 2d 104 (CA9 1976).
In sum, the evidence shows beyond all doubt that Chiarella, working literally in the shadows of
the warning signs in the printshop, misappropriated—stole to put it bluntly—valuable nonpublic
information entrusted to him in the utmost confidence. He then exploited his ill-gotten
informational advantage by purchasing securities in the market. In my view, such conduct
plainly violates § 10 (b) and Rule 10b-5. Accordingly, I would affirm the judgment of the Court
of Appeals.
MR. JUSTICE BLACKMUN, with whom MR. JUSTICE MARSHALL joins, dissenting.
Although I agree with much of what is said in Part I of the dissenting opinion of THE CHIEF
JUSTICE, ante, p. 239, I write separately because, in my view, it is unnecessary to rest
petitioner’s conviction on a “misappropriation” theory. The fact that petitioner Chiarella
purloined, or, to use THE CHIEF 246*246 JUSTICE’s word, ante, at 245, “stole,” information
concerning pending tender offers certainly is the most dramatic evidence that petitioner was
guilty of fraud. He has conceded that he knew it was wrong, and he and his co-workers in the
printshop were specifically warned by their employer that actions of this kind were improper and
forbidden. But I also would find petitioner’s conduct fraudulent within the meaning of § 10 (b) of
the Securities Exchange Act of 1934, 15 U. S. C. § 78j (b), and the Securities and Exchange
Commission’s Rule 10b-5, 17 CFR § 240.10b-5 (1979), even if he had obtained the blessing of
his employer’s principals before embarking on his profiteering scheme. Indeed, I think
petitioner’s brand of manipulative trading, with or without such approval, lies close to the heart
of what the securities laws are intended to prohibit.
The Court continues to pursue a course, charted in certain recent decisions, designed to transform
§ 10 (b) from an intentionally elastic “catchall” provision to one that catches relatively little of
the misbehavior that all too often makes investment in securities a needlessly risky business for
the uninitiated investor. See, e. g., Ernst & Ernst v. Hochfelder, 425 U. S. 185 (1976); Blue Chip
Stamps v. Manor Drug Stores, 421 U. S. 723 (1975). Such confinement in this case is now
achieved by imposition of a requirement of a “special relationship” akin to fiduciary duty before
the statute gives rise to a duty to disclose or to abstain from trading upon material, nonpublic
information.[1] The Court admits that this conclusion finds no mandate in the language of the
statute or its legislative history. Ante, at 226. Yet the Court fails even to attempt a justification of
its ruling in terms of the purposes 247*247 of the securities laws, or to square that ruling with the
longstanding but now much abused principle that the federal securities laws are to be construed
flexibly rather than with narrow technicality. See Affiliated Ute Citizens v. United States, 406 U.
S. 128, 151 (1972); Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U. S. 6, 12
(1971); SEC v. Capital Gains Research Bureau, 375 U. S. 180, 186 (1963).
I, of course, agree with the Court that a relationship of trust can establish a duty to disclose under
§ 10 (b) and Rule 10b-5. But I do not agree that a failure to disclose violates the Rule only when
the responsibilities of a relationship of that kind have been breached. As applied to this case, the
Court’s approach unduly minimizes the importance of petitioner’s access to confidential
information that the honest investor, no matter how diligently he tried, could not legally obtain.
In doing so, it further advances an interpretation of § 10 (b) and Rule 10b-5 that stops short of
their full implications. Although the Court draws support for its position from certain precedent,
I find its decision neither fully consistent with developments in the common law of fraud, nor
fully in step with administrative and judicial application of Rule 10b-5 to “insider” trading.
The common law of actionable misrepresentation long has treated the possession of “special
facts” as a key ingredient in the duty to disclose. See Strong v. Repide, 213 U. S. 419, 431-433
(1909); 1 F. Harper & F. James, Law of Torts § 7.14 (1956). Traditionally, this factor has been
prominent in cases involving confidential or fiduciary relations, where one party’s inferiority of
knowledge and dependence upon fair treatment is a matter of legal definition, as well as in cases
where one party is on notice that the other is “acting under a mistaken belief with respect to a
material fact.” Frigitemp Corp. v. Financial Dynamics Fund, Inc., 524 F. 2d 275, 283 (CA2
1975); see also Restatement of Torts § 551 (1938). Even at common law, however, there has
been a trend away from strict adherence to the harsh maxim caveat emptor and 248*248 toward
a more flexible, less formalistic understanding of the duty to disclose. See, e. g., Keeton, Fraud—
Concealment and Non-Disclosure, 15 Texas L. Rev. 1, 31 (1936). Steps have been taken toward
application of the “special facts” doctrine in a broader array of contexts where one party’s
superior knowledge of essential facts renders a transaction without disclosure inherently unfair.
See James & Gray, Misrepresentation— Part II, 37 Md. L. Rev. 488, 526-527 (1978); 3
Restatement (Second) of Torts § 551 (e), Comment l (1977); id., at 166-167 (Tent. Draft No. 10,
1964). See also Lingsch v. Savage, 213 Cal. App. 2d 729, 735-737, 29 Cal. Rptr. 201, 204-206
(1963); Jenkins v. McCormick, 184 Kan. 842, 844-845, 339 P. 2d 8, 11 (1959); Jones v. Arnold,
359 Mo. 161, 169-170, 221 S. W. 2d 187, 193-194 (1949); Simmons v. Evans, 185 Tenn. 282,
285-287, 206 S. W. 2d 295, 296-297 (1947).
By its narrow construction of § 10 (b) and Rule 10b-5, the Court places the federal securities
laws in the rearguard of this movement, a position opposite to the expectations of Congress at the
time the securities laws were enacted. Cf. H. R. Rep. No. 1383, 73d Cong., 2d Sess., 5 (1934). I
cannot agree that the statute and Rule are so limited. The Court has observed that the securities
laws were not intended to replicate the law of fiduciary relations. Santa Fe Industries, Inc. v.
Green, 430 U. S. 462, 474-476 (1977). Rather, their purpose is to ensure the fair and honest
functioning of impersonal national securities markets where common-law protections have
proved inadequate. Cf. United States v. Naftalin, 441 U. S. 768, 775 (1979). As Congress itself
has recognized, it is integral to this purpose “to assure that dealing in securities is fair and
without undue preferences or advantages among investors.” H. R. Conf. Rep. No. 94-229, p. 91
(1975).
Indeed, the importance of access to “special facts” has been a recurrent theme in administrative
and judicial application 249*249 of Rule 10b-5 to insider trading. Both the SEC and the courts
have stressed the insider’s misuse of secret knowledge as the gravamen of illegal conduct. The
Court, I think, unduly minimizes this aspect of prior decisions.
Cady, Roberts & Co., 40 S. E. C. 907 (1961), which the Court discusses at some length, provides
an illustration. In that case, the Commission defined the category of “insiders” subject to a
disclose-or-abstain obligation according to two factors:
“[F]irst, the existence of a relationship giving access, directly or indirectly, to information
intended to be available only for a corporate purpose and not for the personal benefit of anyone,
and second, the inherent unfairness involved where a party takes advantage of such information
knowing it is unavailable to those with whom he is dealing.” Id., at 912 (footnote omitted).
The Commission, thus, regarded the insider “relationship” primarily in terms of access to
nonpublic information, and not merely in terms of the presence of a common-law fiduciary duty
or the like. This approach was deemed to be in keeping with the principle that “the broad
language of the anti-fraud provisions” should not be “circumscribed by fine distinctions and rigid
classifications,” such as those that prevailed under the common law. Ibid. The duty to abstain or
disclose arose, not merely as an incident of fiduciary responsibility, but as a result of the
“inherent unfairness” of turning secret information to account for personal profit. This
understanding of Rule 10b-5 was reinforced when Investors Management Co., 44 S. E. C. 633,
643 (1971), specifically rejected the contention that a “special relationship” between the alleged
violator and an “insider” source was a necessary requirement for liability.
A similar approach has been followed by the courts. In SEC v. Texas Gulf Sulphur Co., 401 F. 2d
833, 848 (CA2 250*250 1968) (en banc), cert. denied sub nom. Coates v. SEC, 394 U. S. 976
(1969), the court specifically mentioned the common-law “special facts” doctrine as one source
for Rule 10b-5, and it reasoned that the Rule is “based in policy on the justifiable expectation of
the securities marketplace that all investors trading on impersonal exchanges have relatively
equal access to material information.” See also Lewelling v. First California Co., 564 F. 2d 1277,
1280 (CA9 1977); Speed v. Transamerica Corp., 99 F. Supp. 808, 829 (Del. 1951). In addition,
cases such as Myzel v. Fields, 386 F. 2d 718, 739 (CA8 1967), cert. denied, 390 U. S. 951
(1968), and A. T. Brod & Co. v. Perlow, 375 F. 2d 393, 397 (CA2 1967), have stressed that § 10
(b) and Rule 10b-5 apply to any kind of fraud by any person. The concept of the “insider” itself
has been flexible; wherever confidential information has been abused, prophylaxis has followed.
See, e. g., Zweig v. Hearst Corp., 594 F. 2d 1261 (CA9 1979) (financial columnist); Shapiro v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 495 F. 2d 228 (CA2 1974) (institutional investor);
SEC v. Shapiro, 494 F. 2d 1301 (CA2 1974) (merger negotiator); Chasins v. Smith, Barney &
Co., 438 F. 2d 1167 (CA2 1970) (market maker). See generally 2 A. Bromberg & L. Lowenfels,
Securities Law & Commodities Fraud § 7.4 (6) (b) (1979).
I believe, and surely thought, that this broad understanding of the duty to disclose under Rule
10b-5 was recognized and approved in Affiliated Ute Citizens v. United States, 406 U. S. 128
(1972). That case held that bank agents dealing in the stock of a Ute Indian development
corporation had a duty to reveal to mixed-blood Indian customers that their shares could bring a
higher price on a non-Indian market of which the sellers were unaware. Id., at 150-153. The
Court recognized that “by repeated use of the word `any,'” the statute and Rule “are obviously
meant to be inclusive.” Id., at 151. Although it found a relationship of trust between 251*251 the
agents and the Indian sellers, the Court also clearly established that the bank and its agents were
subject to the strictures of Rule 10b-5 because of their strategic position in the marketplace. The
Indian sellers had no knowledge of the non-Indian market. The bank agents, in contrast, had
intimate familiarity with the non-Indian market, which they had promoted actively, and from
which they and their bank both profited. In these circumstances, the Court held that the bank and
its agents “possessed the affirmative duty under the Rule” to disclose market information to the
Indian sellers, and that the latter “had the right to know” that their shares would sell for a higher
price in another market. Id., at 153.
It seems to me that the Court, ante, at 229-230, gives Affiliated Ute Citizens an unduly narrow
interpretation. As I now read my opinion there for the Court, it lends strong support to the
principle that a structural disparity in access to material information is a critical factor under
Rule 10b-5 in establishing a duty either to disclose the information or to abstain from trading.
Given the factual posture of the case, it was unnecessary to resolve the question whether such a
structural disparity could sustain a duty to disclose even absent “a relationship of trust and
confidence between parties to a transaction.” Ante, at 230. Nevertheless, I think the rationale of
Affiliated Ute Citizens definitely points toward an affirmative answer to that question. Although I
am not sure I fully accept the “market insider” category created by the Court of Appeals, I would
hold that persons having access to confidential material information that is not legally available
to others generally are prohibited by Rule 10b-5 from engaging in schemes to exploit their
structural informational advantage through trading in affected securities. To hold otherwise, it
seems to me, is to tolerate a wide range of manipulative and deceitful behavior. See Blyth & Co.,
43 S. E. C. 1037 (1969); Herbert L. Honohan, 13 S. E. C. 754 (1943); see generally Brudney,
Insiders, Outsiders, and Informational Advantages 252*252 under the Federal Securities Laws,
93 Harv. L. Rev. 322 (1979).[2]
Whatever the outer limits of the Rule, petitioner Chiarella’s case fits neatly near the center of its
analytical framework. He occupied a relationship to the takeover companies giving him intimate
access to concededly material information that was sedulously guarded from public access. The
information, in the words of Cady, Roberts & Co., 40 S. E. C., at 912, was “intended to be
available only for a corporate purpose and not for the personal benefit of anyone.” Petitioner,
moreover, knew that the information was unavailable to those with whom he dealt. And he took
full, virtually riskless advantage of this artificial information gap by selling the stocks shortly
after each takeover bid was announced. By any reasonable definition, his trading was
“inherent[ly] unfai[r].” Ibid. This misuse of confidential information was clearly placed before
the jury. Petitioner’s conviction, therefore, should be upheld, and I dissent from the Court’s
upsetting that conviction.
[*] Arthur Fleischer, Jr., Harvey L. Pitt, Richard A. Steinwurtzel, and Richard O. Scribner filed a memorandum for
the Securities Industry Association as amicus curiae.
[1] Of the five transactions, four involved tender offers and one concerned a merger. 588 F. 2d 1358, 1363, n. 2
(CA2 1978).
[2] SEC v. Chiarella, No. 77 Civ. Action No. 2534 (GLG) (SDNY May 24, 1977).
[3] Section 32 (a) of the 1934 Act sanctions criminal penalties against any person who willfully violates the Act. 15
U. S. C. § 78ff (a) (1976 ed., Supp. II). Petitioner was charged with 17 counts of violating the Act because he had
received 17 letters confirming purchase of shares.
[4] 450 F. Supp. 95 (SDNY 1978).
[5] Only Rules 10b-5 (a) and (c) are at issue here. Rule 10b-5 (b) provides that it shall be unlawful “[t]o make any
untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made,
in the light of the circumstances under which they were made, not misleading.” 17 CFR § 240.10b-5 (b) (1979). The
portion of the indictment based on this provision was dismissed because the petitioner made no statements at all in
connection with the purchase of stock.
[6] Record 682-683, 686.
[7] See SEC Securities Exchange Act Release No. 3230 (May 21, 1942), 7 Fed. Reg. 3804 (1942).
[8] In Cady, Roberts, the broker-dealer was liable under § 10 (b) because it received nonpublic information from a
corporate insider of the issuer. Since the insider could not use the information, neither could the partners in the
brokerage firm with which he was associated. The transaction in Cady, Roberts involved sale of stock to persons
who previously may not have been shareholders in the corporation. 40 S. E. C., at 913, and n. 21. The Commission
embraced the reasoning of Judge Learned Hand that “the director or officer assumed a fiduciary relation to the buyer
by the very sale; for it would be a sorry distinction to allow him to use the advantage of his position to induce the
buyer into the position of a beneficiary although he was forbidden to do so once the buyer had become one.” Id., at
914, n. 23, quoting Gratz v. Claughton, 187 F. 2d 46, 49 (CA2), cert. denied, 341 U. S. 920 (1951).
[9] Restatement (Second) of Torts § 551 (2) (a) (1976). See James & Gray, Misrepresentation—Part II, 37 Md. L.
Rev. 488, 523-527 (1978). As regards securities transactions, the American Law Institute recognizes that “silence
when there is a duty to . . . speak may be a fraudulent act.” ALI, Federal Securities Code § 262 (b) (Prop. Off. Draft
1978).
[10] See 3 W. Fletcher, Cyclopedia of the Law of Private Corporations § 838 (rev. 1975); 3A id., §§ 1168.2, 1171,
1174; 3 L. Loss, Securities Regulation 1446-1448 (2d ed. 1961); 6 id., at 3557-3558 (1969 Supp.). See also Brophy
v. Cities Service Co., 31 Del. Ch. 241, 70 A. 2d 5 (1949). See generally Note, Rule 10b-5: Elements of a Private
Right of Action, 43 N. Y. U. L. Rev. 541, 552-553, and n. 71 (1968); 75 Harv. L. Rev. 1449, 1450 (1962); Daum &
Phillips, The Implications of Cady, Roberts, 17 Bus. L. 939, 945 (1962).
The dissent of MR. JUSTICE BLACKMUN suggests that the “special facts” doctrine may be applied to find that
silence constitutes fraud where one party has superior information to another. Post, at 247-248. This Court has never
so held. In Strong v. Repide, 213 U. S. 419, 431-434 (1909), this Court applied the special-facts doctrine to conclude
that a corporate insider had a duty to disclose to a shareholder. In that case, the majority shareholder of a corporation
secretly purchased the stock of another shareholder without revealing that the corporation, under the insider’s
direction, was about to sell corporate assets at a price that would greatly enhance the value of the stock. The decision
in Strong v. Repide was premised upon the fiduciary duty between the corporate insider and the shareholder. See
Pepper v. Litton, 308 U. S. 295, 307, n. 15 (1939).
[11] See also SEC v. Great American Industries, Inc., 407 F. 2d 453, 460 (CA2 1968), cert. denied, 395 U. S. 920
(1969); Kohler v. Kohler Co., 319 F. 2d 634, 637-638 (CA7 1963); Note, 43 N. Y. U. L. Rev., supra n. 10, at 554;
Note, The Regulation of Corporate Tender Offers Under Federal Securities Law: A New Challenge for Rule 10b-5,
33 U. Chi. L. Rev. 359, 373-374 (1966). See generally Note, Civil Liability under Rule X-10b-5, 42 Va. L. Rev.
537, 554-561 (1956).
[12] “Tippees” of corporate insiders have been held liable under § 10 (b) because they have a duty not to profit from
the use of inside information that they know is confidential and know or should know came from a corporate insider,
Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 495 F. 2d 228, 237-238 (CA2 1974). The tippee’s obligation
has been viewed as arising from his role as a participant after the fact in the insider’s breach of a fiduciary duty.
Subcommittees of American Bar Association Section of Corporation, Banking, and Business Law, Comment Letter
on Material, Non-Public Information (Oct. 15, 1973), reprinted in BNA, Securities Regulation & Law Report No.
233, pp. D-1, D-2 (Jan. 2, 1974).
[13] See Fleischer, Mundheim, & Murphy, An Initial Inquiry into the Responsibility to Disclose Market
Information, 121 U. Pa. L. Rev. 798, 799 (1973).
[14] The Court of Appeals said that its “regular access to market information” test would create a workable rule
embracing “those who occupy . . . strategic places in the market mechanism.” 588 F. 2d, at 1365. These
considerations are insufficient to support a duty to disclose. A duty arises from the relationship between parties, see
nn. 9 and 10, supra, and accompanying text, and not merely from one’s ability to acquire information because of his
position in the market.
The Court of Appeals also suggested that the acquiring corporation itself would not be a “market insider” because a
tender offeror creates, rather than receives, information and takes a substantial economic risk that its offer will be
unsuccessful. 588 F. 2d, at 1366-1367. Again, the Court of Appeals departed from the analysis appropriate to
recognition of a duty. The Court of Appeals for the Second Circuit previously held, in a manner consistent with our
analysis here, that a tender offeror does not violate § 10 (b) when it makes preannouncement purchases precisely
because there is no relationship between the offeror and the seller:
“We know of no rule of law . . . that a purchaser of stock, who was not an `insider’ and had no fiduciary relation to a
prospective seller, had any obligation to reveal circumstances that might raise a seller’s demands and thus abort the
sale.” General Time Corp. v. Talley Industries, Inc., 403 F. 2d 159, 164 (1968), cert. denied, 393 U. S. 1026 (1969).
[15] Title 15 U. S. C. § 78m (d) (1) (1976 ed., Supp. II) permits a tender offeror to purchase 5% of the target
company’s stock prior to disclosure of its plan for acquisition.
[16] Section 11 of the 1934 Act generally forbids a member of a national securities exchange from effecting any
transaction on the exchange for its own account. 15 U. S. C. § 78k (a) (1). But Congress has specifically exempted
specialists from this prohibition—broker-dealers who execute orders for customers trading in a specific
corporation’s stock, while at the same time buying and selling that corporation’s stock on their own behalf. § 11 (a)
(1) (A), 15 U. S. C. § 78k (a) (1) (A); see S. Rep. No. 94-75, p. 99 (1975); Securities and Exchange Commission,
Report of Special Study of Securities Markets, H. R. Doc. No. 95, 88th Cong., 1st Sess., pt. 2, pp. 57-58, 76 (1963).
See generally S. Robbins, The Securities Markets 191-193 (1966). The exception is based upon Congress’
recognition that specialists contribute to a fair and orderly marketplace at the same time they exploit the
informational advantage that comes from their possession of buy and sell orders. H. R. Doc. No. 95, supra, at 78-80.
Similar concerns with the functioning of the market prompted Congress to exempt market makers, block positioners,
registered odd-lot dealers, bona fide arbitrageurs, and risk arbitrageurs from § 11’s general prohibition on member
trading. 15 U. S. C. §§ 78k (a) (1) (A)-(D); see S. Rep. No. 94-75, supra, at 99. See also Securities Exchange Act
Release No. 34-9950, 38 Fed. Reg. 3902, 3918 (1973).
[17] Fleischer, Mundheim, & Murphy, supra n. 13, at 811-812.
[18] SEC Proposed Rule § 240.14e-3, 44 Fed. Reg. 70352-70355, 70359 (1979).
[19] 1 SEC Institutional Investor Study Report, H. R. Doc. No. 92-64, pt. 1, p. xxxii (1971).
[20] MR. JUSTICE BLACKMUN’s dissent would establish the following standard for imposing criminal and civil
liability under § 10 (b) and Rule 10b-5:
“[P]ersons having access to confidential material information that is not legally available to others generally are
prohibited . . . from engaging in schemes to exploit their structural informational advantage through trading in
affected securities.” Post, at 251.
This view is not substantially different from the Court of Appeals’ theory that anyone “who regularly receives
material nonpublic information may not use that information to trade in securities without incurring an affirmative
duty to disclose,” 588 F. 2d, at 1365, and must be rejected for the reasons stated in Part III. Additionally, a judicial
holding that certain undefined activities “generally are prohibited” by § 10 (b) would raise questions whether either
criminal or civil defendants would be given fair notice that they have engaged in illegal activity. Cf. Grayned v. City
of Rockford, 408 U. S. 104, 108-109 (1972).
It is worth noting that this is apparently the first case in which criminal liability has been imposed upon a purchaser
for § 10 (b) nondisclosure. Petitioner was sentenced to a year in prison, suspended except for one month, and a 5year term of probation. 588 F. 2d, at 1373, 1378 (Meskill, J., dissenting).
[21] The dissent of THE CHIEF JUSTICE relies upon a single phrase from the jury instructions, which states that
the petitioner held a “confidential position” at Pandick Press, to argue that the jury was properly instructed on the
theory “that a person who has misappropriated nonpublic information has an absolute duty to disclose that
information or to refrain from trading.” Post, at 240. The few words upon which this thesis is based do not explain to
the jury the nature and scope of the petitioner’s duty to his employer, the nature and scope of petitioner’s duty, if any,
to the acquiring corporation, or the elements of the tort of misappropriation. Nor do the jury instructions suggest that
a “confidential position” is a necessary element of the offense for which petitioner was charged. Thus, we do not
believe that a “misappropriation” theory was included in the jury instructions.
The conviction would have to be reversed even if the jury had been instructed that it could convict the petitioner
either (1) because of his failure to disclose material, nonpublic information to sellers or (2) because of a breach of a
duty to the acquiring corporation. We may not uphold a criminal conviction if it is impossible to ascertain whether
the defendant has been punished for noncriminal conduct. United States v. Gallagher, 576 F. 2d 1028, 1046 (CA3
1978); see Leary v. United States, 395 U. S. 6, 31-32 (1969); Stromberg v. California, 283 U. S. 359, 369-370
(1931).
[*] See Eason v. General Motors Acceptance Corp., 490 F. 2d 654 (CA7 1973), cert. denied, 416 U. S. 960. The
specific holding in Eason was rejected in Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723. However, the
limitation on the right to recover pecuniary damages in a private action identified in Blue Chip is not necessarily
coextensive with the limits of the rule itself. Cf. Piper v. Chris-Craft Industries, Inc., 430 U. S. 1, 42, n. 28, 43, n.
30, 47, n. 33.
[1] Academic writing in recent years has distinguished between “corporate information”—information which comes
from within the corporation and reflects on expected earnings or assets—and “market information.” See, e. g.,
Fleischer, Mundheim, & Murphy, An Initial Inquiry into the Responsibility to Disclose Market Information, 121 U.
Pa. L. Rev. 798, 799 (1973). It is clear that § 10 (b) and Rule 10b-5 by their terms and by their history make no such
distinction. See Brudney, Insiders, Outsiders, and Informational Advantages Under the Federal Securities Laws, 93
Harv. L. Rev. 322, 329-333 (1979).
[2] See Financial Analysts Rec., Oct. 7, 1968, pp. 3, 5 (interview with SEC General Counsel Philip A. Loomis, Jr.)
(the essential characteristic of insider information is that it is “received in confidence for a purpose other than to use
it for the person’s own advantage and to the disadvantage of the investing public in the market”). See also Note, The
Government Insider and Rule 10b-5: A New Application for an Expanding Doctrine, 47 S. Cal. L. Rev. 1491, 14981502 (1974).
[3] This interpretation of the antifraud provisions also finds support in the recently proposed Federal Securities Code
prepared by the American Law Institute under the direction of Professor Louis Loss. The ALI Code would construe
the antifraud provisions to cover a class of “quasi-insiders,” including a judge’s law clerk who trades on information
in an unpublished opinion or a Government employee who trades on a secret report. See ALI Federal Securities
Code § 1603, comment 3 (d), pp. 538-539 (Prop. Off. Draft 1978). These quasi-insiders share the characteristic that
their informational advantage is obtained by conversion and not by legitimate economic activity that society seeks to
encourage.
[4] There is some language in the Court’s opinion to suggest that only “a relationship between petitioner and the
sellers . . . could give rise to a duty [to disclose].” Ante, at 232. The Court’s holding, however, is much more limited,
namely, that mere possession of material, nonpublic information is insufficient to create a duty to disclose or to
refrain from trading. Ante, at 235. Accordingly, it is my understanding that the Court has not rejected the view,
advanced above, that an absolute duty to disclose or refrain arises from the very act of misappropriating nonpublic
information.
[1] The Court fails to specify whether the obligations of a special relationship must fall directly upon the person
engaging in an allegedly fraudulent transaction, or whether the derivative obligations of “tippees,” that lower courts
long have recognized, are encompassed by its rule. See ante, at 230, n. 12; cf. Foremost-McKesson, Inc. v.
Provident Securities Co., 423 U. S. 232, 255, n. 29 (1976).
[2] The Court observes that several provisions of the federal securities laws limit but do not prohibit trading by
certain investors who may possess nonpublic market information. Ante, at 233-234. It also asserts that “neither the
Congress nor the Commission ever has adopted a parity-of-information rule.” Ante, at 233. In my judgment, neither
the observation nor the assertion undermines the interpretation of Rule 10b-5 that I support and that I have
endeavored briefly to outline. The statutory provisions cited by the Court betoken a congressional purpose not to
leave the exploitation of structural informational advantages unregulated. Letting Rule 10b-5 operate as a “catchall”
to ensure that these narrow exceptions granted by Congress are not expanded by circumvention completes this
statutory scheme. Furthermore, there is a significant conceptual distinction between parity of information and parity
of access to material information. The latter gives free rein to certain kinds of informational advantages that the
former might foreclose, such as those that result from differences in diligence or acumen. Indeed, by limiting
opportunities for profit from manipulation of confidential connections or resort to stealth, equal access helps to
ensure that advantages obtained by honest means reap their full reward.
Page 1
DIRKS v. SECURITIES AND EXCHANGE COMMISSION
No. 82-276
SUPREME COURT OF THE UNITED STATES
463 U.S. 646; 103 S. Ct. 3255; 77 L. Ed. 2d 911; 1983 U.S. LEXIS 102; 51 U.S.L.W.
5123; Fed. Sec. L. Rep. (CCH) P99,255
March 21, 1983 Argued
July 1, 1983, Decided
JUDGES: POWELL, J., delivered the opinion of the Court, in which BURGER, C. J., and WHITE, REHNQUIST,
STEVENS, and O’CONNOR, JJ., joined. BLACKMUN, J., filed a dissenting opinion, in which BRENNAN and
MARSHALL, JJ., joined, post, p. 667.
OPINION BY: POWELL
OPINION
JUSTICE POWELL delivered the opinion of the Court.
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.
I
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.
1 The facts stated here are taken from more detailed statements set forth by the Administrative Law Judge, App. 176-180, 225-247; the opinion of the Securities and Exchange Commission, 21 S. E. C. Docket 1401, 1402-1406 (1981); and the opinion of Judge Wright in the Court
of Appeals, 220 U. S. App. D. C. 309, 314-318, 681 F.2d 824, 829-833 (1982).
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
2 Dirks received from his firm a salary plus a commission for securities transactions above a certain amount that his clients directed through
his firm. See 21 S. E. C. Docket, at 1402, n. 3. But “[it] is not clear how many of those with whom Dirks spoke promised to direct some
brokerage business through [Dirks’ firm] to compensate Dirks, or how many actually did so.” 220 U. S. App. D. C., at 316, 681 F.2d, at 831.
The Boston Company Institutional Investors, Inc., promised Dirks about $ 25,000 in commissions, but it is unclear whether Boston actually
generated any brokerage business for his firm. See App. 199, 204-205; 21 S. E. C. Docket, at 1404, n. 10; 220 U. S. App. D. C., at 316, n. 5,
681 F.2d, at 831, n. 5.
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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 publishing such damaging
hearsay might be libelous.
During the 2-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
3 As early as 1971, the SEC had received allegations of fraudulent accounting practices at Equity Funding. Moreover, on March 9, 1973, an
official of the California Insurance Department informed the SEC’s regional office in Los Angeles of Secrist’s charges of fraud. Dirks himself voluntarily presented his information at the SEC’s regional office beginning on March 27.
4 A federal grand jury in Los Angeles subsequently returned a 105-count indictment against 22 persons, including many of Equity Funding’s
officers and directors. All defendants were found guilty of one or more counts, either by a plea of guilty or a conviction after trial. See Brief
for Petitioner 15; App. 149-153.
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 ß 17(a) of the Securities Act of 1933, 48 Stat. 84, as
amended, 15 U. S. C. ß 77q(a), 5 ß 10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, 15 U. S. C. ß 78j(b), 6
and SEC Rule 10b-5, 17 CFR ß 240.10b-5 (1983), 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 ‘corporate 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 (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
5 Section 17(a), as set forth in 15 U. S. C. ß 77q(a), provides:
“It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly -“(1) to employ any device, scheme, or artifice to defraud, or
“(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
“(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.”
6 Section 10(b) provides:
“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails,
or of any facility of any national securities exchange -“(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not
so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may
prescribe as necessary or appropriate in the public interest or for the protection of investors.”
7 Rule 10b-5 provides:
“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails
or of any facility of any national securities exchange,
“(a) To employ any device, scheme, or artifice to defraud,
“(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not misleading, or
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“(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”
8 JUSTICE BLACKMUN’s dissenting opinion minimizes the role Dirks played in making public the Equity Funding fraud. See post, at 670
and 677, n. 15. The dissent would rewrite the history of Dirks’ extensive investigative efforts. See, e. g., 21 S. E. C. Docket, at 1412 (“It is
clear that Dirks played an important role in bringing [Equity Funding’s] massive fraud to light, and it is also true that he reported the fraud
allegation to [Equity Funding’s] auditors and sought to have the information published in the Wall Street Journal”); 220 U. S. App. D. C., at
314, 681 F.2d, at 829 (Wright, J.) (“Largely thanks to Dirks one of the most infamous frauds in recent memory was uncovered and exposed,
while the record shows that the SEC repeatedly missed opportunities to investigate Equity Funding”).
9 Section 15 of the Securities Exchange Act, 15 U. S. C. ß 78o(b)(4)(E), provides that the SEC may impose certain sanctions, including censure, on any person associated with a registered broker-dealer who has “willfully aided [or] abetted” any violation of the federal securities
laws. See 15 U. S. C. ß 78ff(a) (1976 ed., Supp. V) (providing criminal penalties).
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 whom they
disclose their information before it has been disseminated to the public at large.” 220 U. S. App. D. C. 309, 324, 681
F.2d 824, 839 (1982). Alternatively, Judge Wright concluded that, as an employee of a broker-dealer, Dirks had violated
“obligations to the SEC and to the public completely independent of any obligations he acquired” as a result of receiving the information. Id., at 325, 681 F.2d, at 840.
In view of the importance to the SEC and to the securities industry of the question presented by this case, we granted a
writ of certiorari. 459 U.S. 1014 (1982). We now reverse.
II
In the seminal case of In re Cady, Roberts & Co., 40 S. E. C. 907 (1961), the SEC recognized that the common law in
some jurisdictions imposes on “corporate ‘insiders,’ particularly officers, directors, or controlling stockholders” an “affirmative duty of disclosure . . . when dealing in securities.” Id., at 911, and n. 13. 10 The SEC found that not only did
breach of this common-law duty also establish the elements of a Rule 10b-5 violation, 11 but that individuals other than
corporate insiders could be obligated either to disclose material nonpublic information 12 before trading or to abstain
from trading altogether. Id., at 912. In Chiarella, we accepted the two elements set out in Cady, Roberts for establishing a Rule 10b-5 violation: “(i) the existence of a relationship affording access to inside information intended to be
available only for a corporate purpose, and (ii) the unfairness of allowing a corporate insider to take advantage of that
information by trading without disclosure.” 445 U.S., at 227. In examining whether Chiarella had an obligation to disclose or abstain, the Court found that there is no general duty to disclose before trading on material nonpublic information, 13 and held that “a duty to disclose under ß 10(b) does not arise from the mere possession of nonpublic market
information.” Id., at 235. Such a duty arises rather from the existence of a fiduciary relationship. See id., at 227-235.
10 The duty that insiders owe to the corporation’s shareholders not to trade on inside information differs from the common-law duty that officers and directors also have to the corporation itself not to mismanage corporate assets, of which confidential information is one. See 3 W.
Fletcher, Cyclopedia of the Law of Private Corporations ßß 848, 900 (rev. ed. 1975 and Supp. 1982); 3A id., ßß 1168.1, 1168.2 (rev. ed.
1975). In holding that breaches of this duty to shareholders violated the Securities Exchange Act, the Cady, Roberts Commission recognized, and we agree, that “[a] significant purpose of the Exchange Act was to eliminate the idea that use of inside information for personal
advantage was a normal emolument of corporate office.” See 40 S. E. C., at 912, n. 15.
11 Rule 10b-5 is generally the most inclusive of the three provisions on which the SEC rested its decision in this case, and we will refer to it
when we note the statutory basis for the SEC’s inside-trading rules.
12 The SEC views the disclosure duty as requiring more than disclosure to purchasers or sellers: “Proper and adequate disclosure of significant corporate developments can only be effected by a public release through the appropriate public media, designed to achieve a broad dissemination to the investing public generally and without favoring any special person or group.” In re Faberge, Inc., 45 S. E. C. 249, 256
(1973).
13 See 445 U.S., at 233; id., at 237 (STEVENS, J., concurring); id., at 238-239 (BRENNAN, J., concurring in judgment); id., at 239-240
(BURGER, C. J., dissenting). Cf. id., at 252, n. 2 (BLACKMUN, J., dissenting) (recognizing that there is no obligation to disclose material
nonpublic information obtained through the exercise of “diligence or acumen” and “honest means,” as opposed to “stealth”).
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Not “all breaches of fiduciary duty in connection with a securities transaction,” however, come within the ambit of Rule
10b-5. Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 472 (1977). There must also be “manipulation or deception.”
Id., at 473. 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.” In re Merrill Lynch, Pierce, Fenner & Smith, Inc., 43 S. E. C. 933, 936 (1968). Thus, an insider will be liable under Rule 10b-5 for inside trading only where he fails to disclose material nonpublic information before trading on it and
thus makes “secret profits.” Cady, Roberts, supra, at 916, n. 31.
III
We were explicit in Chiarella in saying that there can be no duty to disclose where the person who has traded on inside
information “was not [the corporation’s] agent, . . . was not a fiduciary, [or] was not a person in whom the sellers [of the
securities] had placed their trust and confidence.” 445 U.S., at 232. Not to require such a fiduciary relationship, we recognized, would “[depart] radically from the established doctrine that duty arises from a specific relationship between
two parties” and would amount to “recognizing a general duty between all participants in market transactions to forgo
actions based on material, nonpublic information.” Id., at 232, 233. This requirement of a specific relationship between
the shareholders and the individual trading on inside information has created analytical difficulties for the SEC and
courts in policing tippees who trade on inside information. Unlike insiders who have independent fiduciary duties to
both the corporation and its shareholders, the typical tippee has no such relationships. 14 In view of this absence, it has
been unclear how a tippee acquires the Cady, Roberts duty to refrain from trading on inside information.
14
Under certain circumstances, such as where corporate information is revealed legitimately to an underwriter, accountant, lawyer, or consultant working for the corporation, these outsiders may become fiduciaries of the shareholders. The basis for recognizing this fiduciary duty is
not simply that such persons acquired nonpublic corporate information, but rather that they have entered into a special confidential relationship in the conduct of the business of the enterprise and are given access to information solely for corporate purposes. See SEC v. Monarch
Fund, 608 F.2d 938, 942 (CA2 1979); In re Investors Management Co., 44 S. E. C. 633, 645 (1971); In re Van Alstyne, Noel & Co., 43 S. E.
C. 1080, 1084-1085 (1969); In re Merrill Lynch, Pierce, Fenner & Smith, Inc., 43 S. E. C. 933, 937 (1968); Cady, Roberts, 40 S. E. C., at
912. When such a person breaches his fiduciary relationship, he may be treated more properly as a tipper than a tippee. See Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 495 F.2d 228, 237 (CA2 1974) (investment banker had access to material information when working on a proposed public offering for the corporation). For such a duty to be imposed, however, the corporation must expect the outsider to
keep the disclosed nonpublic information confidential, and the relationship at least must imply such a duty.
A
The SEC’s position, as stated in its opinion in this case, is that a tippee “inherits” the Cady, Roberts obligation to shareholders whenever he receives inside information from an insider:
“In tipping potential traders, Dirks breached a duty which he had assumed as a result of knowingly receiving confidential information from [Equity Funding] insiders. Tippees such as Dirks who receive non-public, material information
from insiders become ‘subject to the same duty as [the] insiders.’ Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc.
[495 F.2d 228, 237 (CA2 1974) (quoting Ross v. Licht, 263 F.Supp. 395, 410 (SDNY 1967))]. Such a tippee breaches
the fiduciary duty which he assumes from the insider when the tippee knowingly transmits the information to someone
who will probably trade on the basis thereof. . . . Presumably, Dirks’ informants were entitled to disclose the [Equity
Funding] fraud in order to bring it to light and its perpetrators to justice. However, Dirks — standing in their shoes -committed a breach of the fiduciary duty which he had assumed in dealing with them, when he passed the information
on to traders.” 21 S. E. C. Docket, at 1410, n. 42.
This view differs little from the view that we rejected as inconsistent with congressional intent in Chiarella. In that
case, the Court of Appeals agreed with the SEC and affirmed Chiarella’s 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.” United States v. Chiarella, 588 F.2d 1358, 1365 (CA2 1978)
(emphasis in original). Here, the SEC maintains that anyone who knowingly receives nonpublic material information
from an insider has a fiduciary duty to disclose before trading. 15
15 Apparently, the SEC believes this case differs from Chiarella in that Dirks’ receipt of inside information from Secrist, an insider, carried
Secrist’s duties with it, while Chiarella received the information without the direct involvement of an insider and thus inherited no duty to
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disclose or abstain. The SEC fails to explain, however, why the receipt of non-public information from an insider automatically carries with
it the fiduciary duty of the insider. As we emphasized in Chiarella, mere possession of nonpublic information does not give rise to a duty to
disclose or abstain; only a specific relationship does that. And we do not believe that the mere receipt of information from an insider creates
such a special relationship between the tippee and the corporation’s shareholders.
Apparently recognizing the weakness of its argument in light of Chiarella, the SEC attempts to distinguish that case factually as involving
not “inside” information, but rather “market” information, i. e., “information originating outside the company and usually about the supply
and demand for the company’s securities.” Brief for Respondent 22. This Court drew no such distinction in Chiarella and, as THE CHIEF
JUSTICE noted, “[it] is clear that ß 10(b) and Rule 10b-5 by their terms and by their history make no such distinction.” 445 U.S., at 241, n. 1
(dissenting opinion). See ALI, Federal Securities Code ß 1603, Comment (2)(j) (Prop. Off. Draft 1978).
In effect, the SEC’s theory of tippee liability in both cases appears rooted in the idea that the antifraud provisions require equal information among all traders. This conflicts with the principle set forth in Chiarella that only some persons, under some circumstances, will be barred from trading while in possession of material nonpublic information. 16
Judge Wright correctly read our opinion in Chiarella as repudiating any notion that all traders must enjoy equal information before trading: “[The] ‘information’ theory is rejected. Because the disclose-or-refrain duty is extraordinary, it
attaches only when a party has legal obligations other than a mere duty to comply with the general antifraud proscriptions in the federal securities laws.” 220 U. S. App. D. C., at 322, 681 F.2d, at 837. See Chiarella, 445 U.S., at 235, n.
20. We reaffirm today that “[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.” Id., at 231-232, n. 14.
16 In Chiarella, we noted that formulation of an absolute equal information rule “should not be undertaken absent some explicit evidence of
congressional intent.” 445 U.S., at 233. Rather than adopting such a radical view of securities trading, Congress has expressly exempted
many market professionals from the general statutory prohibition set forth in ß 11(a)(1) of the Securities Exchange Act, 15 U. S. C. ß
78k(a)(1), against members of a national securities exchange trading for their own account. See id., at 233, n. 16. We observed in Chiarella
that “[the] exception is based upon Congress’ recognition that [market professionals] contribute to a fair and orderly marketplace at the same
time they exploit the informational advantage that comes from their possession of [nonpublic information].” Ibid.
Imposing a duty to disclose or abstain solely because a person knowingly receives material nonpublic information from
an insider and trades on it could have an inhibiting influence on the role of market analysts, which the SEC itself recognizes is necessary to the preservation of a healthy market. 17 It is commonplace for analysts to “ferret out and analyze
information,” 21 S. E. C. Docket, at 1406, 18 and this often is done by meeting with and questioning corporate officers
and others who are insiders. And information that the analysts obtain normally may be the basis for judgments as to the
market worth of a corporation’s securities. The analyst’s judgment in this respect is made available in market letters or
otherwise to clients of the firm. It is the nature of this type of information, and indeed of the markets themselves, that
such information cannot be made simultaneously available to all of the corporation’s stockholders or the public generally.
17 The SEC expressly recognized that “[the] value to the entire market of [analysts’] efforts cannot be gainsaid; market efficiency in pricing
is significantly enhanced by [their] initiatives to ferret out and analyze information, and thus the analyst’s work redounds to the benefit of all
investors.” 21 S. E. C. Docket, at 1406. The SEC asserts that analysts remain free to obtain from management corporate information for purposes of “filling in the ‘interstices in analysis’. . . .” Brief for Respondent 42 (quoting Investors Management Co., 44 S. E. C., at 646). But
this rule is inherently imprecise, and imprecision prevents parties from ordering their actions in accord with legal requirements. Unless the
parties have some guidance as to where the line is between permissible and impermissible disclosures and uses, neither corporate insiders
nor analysts can be sure when the line is crossed. Cf. Adler v. Klawans, 267 F.2d 840, 845 (CA2 1959) (Burger, J., sitting by designation).
18 On its facts, this case is the unusual one. Dirks is an analyst in a broker-dealer firm, and he did interview management in the course of
his investigation. He uncovered, however, startling information that required no analysis or exercise of judgment as to its market relevance.
Nonetheless, the principle at issue here extends beyond these facts. The SEC’s rule — applicable without regard to any breach by an insider – could have serious ramifications on reporting by analysts of investment views.
Despite the unusualness of Dirks’ “find,” the central role that he played in uncovering the fraud at Equity Funding, and that analysts in general can play in revealing information that corporations may have reason to withhold from the public, is an important one. Dirks’ careful investigation brought to light a massive fraud at the corporation. And until the Equity Funding fraud was exposed, the information in the trading market was grossly inaccurate. But for Dirks’ efforts, the fraud might well have gone undetected longer. See n. 8, supra.
B
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The conclusion that recipients of inside information do not invariably acquire a duty to disclose or abstain does not
mean that such tippees always are free to trade on the information. The need for a ban on some tippee trading is clear.
Not only are insiders forbidden by their fiduciary relationship from personally using undisclosed corporate information
to their advantage, but they also may not give such information to an outsider for the same improper purpose of exploiting the information for their personal gain. See 15 U. S. C. ß 78t(b) (making it unlawful to do indirectly “by means of
any other person” any act made unlawful by the federal securities laws). Similarly, the transactions of those who knowingly participate with the fiduciary in such a breach are “as forbidden” as transactions “on behalf of the trustee himself.”
Mosser v. Darrow, 341 U.S. 267, 272 (1951). See Jackson v. Smith, 254 U.S. 586, 589 (1921); Jackson v. Ludeling, 21
Wall. 616, 631-632 (1874). As the Court explained in Mosser , a contrary rule “would open up opportunities for devious
dealings in the name of others that the trustee could not conduct in his own.” 341 U.S., at 271. See SEC v. Texas Gulf
Sulphur Co., 446 F.2d 1301, 1308 (CA2), cert. denied, 404 U.S. 1005 (1971). Thus, the tippee’s duty to disclose or abstain is derivative from that of the insider’s duty. See Tr. of Oral Arg. 38. Cf. Chiarella, 445 U.S., at 246, n. 1
(BLACKMUN, J., dissenting). As we noted in Chiarella, “[the] tippee’s obligation has been viewed as arising from his
role as a participant after the fact in the insider’s breach of a fiduciary duty.” Id., at 230, n. 12.
Thus, some 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. 19 And for Rule 10b-5 purposes, the insider’s disclosure is
improper only where it would violate his Cady, Roberts duty. 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. 20 As Commissioner Smith perceptively observed in In re Investors Management Co., 44 S. E. C. 633 (1971):
“[Tippee] responsibility must be related back to insider responsibility by a necessary finding that the tippee knew the
information was given to him in breach of a duty by a person having a special relationship to the issuer not to disclose
the information . . . .” Id., at 651 (concurring in result). Tipping thus properly is viewed only as a means of indirectly
violating the Cady, Roberts disclose-or-abstain rule. 21
19 The SEC itself has recognized that tippee liability properly is imposed only in circumstances where the tippee knows, or has reason to
know, that the insider has disclosed improperly inside corporate information. In Investors Management Co., supra, the SEC stated that one
element of tippee liability is that the tippee knew or had reason to know that the information “was non-public and had been obtained improperly by selective revelation or otherwise.” 44 S. E. C., at 641 (emphasis added). Commissioner Smith read this test to mean that a tippee can
be held liable only if he received information in breach of an insider’s duty not to disclose it. Id., at 650 (concurring in result).
20 Professor Loss has linked tippee liability to the concept in the law of restitution that “‘[where] a fiduciary in violation of his duty to the
beneficiary communicates confidential information to a third person, the third person, if he had notice of the violation of duty, holds upon a
constructive trust for the beneficiary any profit which he makes through the use of such information.'” 3 L. Loss, Securities Regulation 1451
(2d ed. 1961) (quoting Restatement of Restitution ß 201(2) (1937)). Other authorities likewise have expressed the view that tippee liability
exists only where there has been a breach of trust by an insider of which the tippee had knowledge. See, e. g., Ross v. Licht, 263 F.Supp.
395, 410 (SDNY 1967); A. Jacobs, The Impact of Rule 10b-5, ß 167, p. 7-4 (rev. ed. 1980) (“[The] better view is that a tipper must know or
have reason to know the information is nonpublic and was improperly obtained”); Fleischer, Mundheim, & Murphy, An Initial Inquiry Into
the Responsibility to Disclose Market Information, 121 U. Pa. L. Rev. 798, 818, n. 76 (1973) (“The extension of rule 10b-5 restrictions to
tippees of corporate insiders can best be justified on the theory that they are participating in the insider’s breach of his fiduciary duty”). Cf.
Restatement (Second) of Agency ß 312, Comment c (1958) (“A person who, with notice that an agent is thereby violating his duty to his
principal, receives confidential information from the agent, may be [deemed] . . . a constructive trustee”).
21
We do not suggest that knowingly trading on inside information is ever “socially desirable or even that it is devoid of moral considerations.” Dooley, Enforcement of Insider Trading Restrictions, 66 Va. L. Rev. 1, 55 (1980). Nor do we imply an absence of responsibility to
disclose promptly indications of illegal actions by a corporation to the proper authorities — typically the SEC and exchange authorities in
cases involving securities. Depending on the circumstances, and even where permitted by law, one’s trading on material nonpublic information is behavior that may fall below ethical standards of conduct. But in a statutory area of the law such as securities regulation, where
legal principles of general application must be applied, there may be “significant distinctions between actual legal obligations and ethical
ideals.” SEC, Report of Special Study of Securities Markets, H. R. Doc. No. 95, 88th Cong., 1st Sess., pt. 1, pp. 237-238 (1963). The SEC
recognizes this. At oral argument, the following exchange took place:
“QUESTION: So, it would not have satisfied his obligation under the law to go to the SEC first?
“[SEC’s counsel]: That is correct. That an insider has to observe what has come to be known as the abstain or disclosure rule. Either the information has to be disclosed to the market if it is inside information . . . or the insider must abstain.” Tr. of Oral Arg. 27.
Thus, it is clear that Rule 10b-5 does not impose any obligation simply to tell the SEC about the fraud before trading.
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C
In determining whether a tippee is under an obligation to disclose or abstain, it thus is necessary to determine whether
the insider’s “tip” constituted a breach of the insider’s fiduciary duty. All disclosures of confidential corporate information are not inconsistent with the duty insiders owe to shareholders. In contrast to the extraordinary facts of this case,
the more typical situation in which there will be a question whether disclosure violates the insider’s Cady, Roberts duty
is when insiders disclose information to analysts. See n. 16, supra. In some situations, the insider will act consistently
with his fiduciary duty to shareholders, and yet release of the information may affect the market. For example, it may
not be clear — either to the corporate insider or to the recipient analyst — whether the information will be viewed as material nonpublic information. Corporate officials may mistakenly think the information already has been disclosed or
that it is not material enough to affect the market. Whether disclosure is a breach of duty therefore depends in large part
on the purpose of the disclosure. This standard was identified by the SEC itself in Cady, Roberts: a purpose of the securities laws was to eliminate “use of inside information for personal advantage.” 40 S. E. C., at 912, n. 15. See n. 10, supra. Thus, [HN7] the test is whether the insider personally will benefit, directly or indirectly, from his disclosure. Absent some personal gain, there has been no breach of duty to stockholders. And absent a breach by the insider, there is
no derivative breach. 22 As Commissioner Smith stated in Investors Management Co.: “It is important in this type of
case to focus on policing insiders and what they do . . . rather than on policing information per se and its possession. . .
.” 44 S. E. C., at 648 (concurring in result).
22 An example of a case turning on the court’s determination that the disclosure did not impose any fiduciary duties on the recipient of the
inside information is Walton v. Morgan Stanley & Co., 623 F.2d 796 (CA2 1980). There, the defendant investment banking firm, representing one of its own corporate clients, investigated another corporation that was a possible target of a takeover bid by its client. In the course
of negotiations the investment banking firm was given, on a confidential basis, unpublished material information. Subsequently, after the
proposed takeover was abandoned, the firm was charged with relying on the information when it traded in the target corporation’s stock. For
purposes of the decision, it was assumed that the firm knew the information was confidential, but that it had been received in arm’s-length
negotiations. See id., at 798. In the absence of any fiduciary relationship, the Court of Appeals found no basis for imposing tippee liability
on the investment firm. See id., at 799.
The SEC argues that, if inside-trading liability does not exist when the information is transmitted for a proper purpose
but is used for trading, it would be a rare situation when the parties could not fabricate some ostensibly legitimate business justification for transmitting the information. We think the SEC is unduly concerned. In determining whether the
insider’s purpose in making a particular disclosure is fraudulent, the SEC and the courts are not required to read the parties’ minds. Scienter in some cases is relevant in determining whether the tipper has violated his Cady, Roberts duty. 23
But to determine whether the disclosure itself “[deceives], [manipulates], or [defrauds]” shareholders, Aaron v. SEC,
446 U.S. 680, 686 (1980), the initial inquiry is whether there has been a breach of duty by the insider. This requires
courts to focus on objective criteria, i. e., whether the insider receives a direct or indirect personal benefit from the disclosure, such as a pecuniary gain or a reputational benefit that will translate into future earnings. Cf. 40 S. E. C., at
912, n. 15; Brudney, Insiders, Outsiders, and Informational Advantages Under the Federal Securities Laws, 93 Harv. L.
Rev. 322, 348 (1979) (“The theory . . . is that the insider, by giving the information out selectively, is in effect selling
the information to its recipient for cash, reciprocal information, or other things of value for himself . . .”). There are
objective facts and circumstances that often justify such an inference. For example, there may be a relationship between
the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the particular recipient. The elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of
confidential information to a trading relative or friend. The tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient.
23
Scienter — “a mental state embracing intent to deceive, manipulate, or defraud,” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193-194, n. 12
(1976) — is an independent element of a Rule 10b-5 violation. See Aaron v. SEC, 446 U.S. 680, 695 (1980). Contrary to the dissent’s suggestion, see post, at 674, n. 10, motivation is not irrelevant to the issue of scienter. It is not enough that an insider’s conduct results in harm to
investors; rather, a violation may be found only where there is “intentional or willful conduct designed to deceive or defraud investors by
controlling or artificially affecting the price of securities.” Ernst & Ernst v. Hochfelder, supra, at 199. The issue in this case, h…
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