Securities Regulation: Rule lOb-5 of SEC Act-

Tippees Are Not Liable for Insider Trading, Absent

a Breach of the Insider's Fiduciary Duty
The United States Supreme Court has held that a duty to disclose I under
§ 1O(b) of the Securities Exchange Act of 19342 does not arise from mere pos-
session of non-public market information. 3 In Dirks v. SEC, - U.S. - , 103
S. Ct. 3255 (1983), the United States Supreme Court considers whether an
investment analyst violated the antifraud provisions of the federal securities
laws4 by disclosing non-public informationS received from insiders6 of a cor-
poration with which he had no affiliation.? The Court holds that a tippee 8

1. See generally In re Cady, Roberts & Co., 40 S.E.C. 907 (1961) (establishing a general rule
that certain persons with knowledge of material, non-public information about a company's stock
must either disclose that information or abstain from trading). See also Arber v. Essex Wire
Corp., 490 F.2d 414, 418 (6th Cir.), urt. denied, 419 U.S. 830 (1974) (Underlying the antifraud
provisions of the federal securities laws is the congressional judgment that full disclosure will help
insure fair dealing in insider transactions.). See also infra note 15.
2. 15 U.S.C. § 78j(b) (1982). Section 1O(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.
Id.
The purpose of antifraud provisions, § lO(b) and SEC Rule IOb-5, is to protect the investing
public and to secure fair dealing in the securities market by promoting full disclosure of inside
information so that informed judgments can be made by all investors trading in such markets. An
additional purpose was to prevent corporate insiders and their tippees from taking unfair advan-
tage of uninformed outsiders. See Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 495
F.2d 228, 235 (2d Cir. 1974). See also Fischel, Secondary Liability Under Section lO(b) of the
Securities Act of 1934, 69 CALIF. L. REV. 80 (1981); Siegel, The Interplay Between the Implied
Remedy Under Section 10(b) and the Express Causes of Action of the Federal Securities Law, 62
B.U.L. REV. 385 (1982); Annot., 29 A.L.R. FED. 646 (1976) (discussing the measure and elements
of damages recoverable from insider in private civil action for violation of § I O(b) of the Securities
Exchange Act or SEC Rule IOb-5); Annot., 22 A.L.R.3d 793 (1968) (discussing nondisclosure of
information by insider to seller or purchaser of corporation stock as a manipulative or deceptive
device prohibited by § lO(b) of the Securities Exchange Act).
3. See Chiarella v. United States, 445 U.S. 222, 235 (1980) (possession of material inside
information does not by itself trigger the disclose or abstain rule; only when one comes into pos-
session of material inside information with a pre-existing or derivative fiduciary duty will the
disclose or abstain rule apply). See also infra notes 46-57 and accompanying text.
4. See Dirks v. SEC, - U.S. -, -, 103 S. Ct. 3255,3259 (1983). After a hearing by an
Administrative Law Judge, the SEC found that Dirks had aided and abetted violations of § 17(a)
of the Securities Act of 1933, 15 U.S.C. § 77q(a), § 1O(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78j(b), and SEC Rule IOb-5, 17 C.F.R. § 240.lOb-5 (1982). See also infra notes 58-91
and accompanying text.
5. See infra note 22.
6. See infra note 20.
7. See Dirks v. SEC, - U.S. -, -, 103 S. Ct. 3255, 3264 (1983).
8. A tippee is one who receives material inside information from a corporate insider or
another tippee. See 5A A. JACOBS, THE IMPACT OF RULE IOb-5 § 166 (1977). Seealso Chiarella
v. United States, 445 U.S. 222, 230 n.12 (1980) (A ''tippee'' can be viewed as a participant after the
fact in the insider's breach of a fiduciary duty and therefore the tippee is vested with a duty to
disclose or abstain.); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 848 (2d Cir. 1968) (en banc),
cert. denied, 394 U.S. 976 (1969) (An insider violated Rule IOb-5 by ''tipping'' outside individuals
by divulging material inside information.); Ross v. Litch, 263 F. Supp. 395, 410 (S.D.N.Y. 1967)
(A tippee is a person given information by insiders in breach of trust.); In re Investors Manage-

729
730 Washburn Law Journal [Vol. 23

does not inherit an insider's fiduciary duty to the shareholders of a corporation

not to trade on non-public information, unless the insider has breached his
fiduciary duty9 to the shareholders by disclosing the information to the tippee
and the tippee knows lO or should know that there has been a breach.l1
Securities transactions resulting in the purchase or sale of securities are
federally regulated through the Securities Act of 1933 12 and the Securities Ex-

ment Co., 44 S.E.C. 633, 641 (1971) (A "tippee" is a person who obtains and uses material, non-
public information, knowing or having reason to know that such information is non-public and
has been obtained improperly by selective revelation or otherwise.). See also infra notes 44 & 45
and accompanying text.
The difference between an insider and a tippee is that a tippee generally does not acquire
inside information in a business capacity and does not have a legitimate business reason for know-
ing the non-public information. See Christal & Zaken, SECURITIES LAw-TRADING ON THE BA-
SIS OF NONPUBLIC INFORMATION, 1981 ANN. SURV. OF AM. L. 513, 514 n.4.
For commentary on tippee liability, see Blockman, "Tippee" Liability Under Section lO(b) and
Rule lOb-5 of the Securities Exchange Act of 1934,20 U. KAN. L. REV. 47 (1971); Rapp & Loeb,
Tippee Liability and Rule lOb-5, 1971 U. ILL. L.F. 55; Comment, Deterrence of Tippee Trading
Under Rule lOb-5, 38 U. CHI. L. REV. 372 (1971); Comment, lOb-5: A Testfor Tippee Liability, 4
U. TOL. L. REV. 183 (1973).
9. BLACK'S LAW DICTIONARY 564 (rev. 5th ed. 1979) defines "fiduciary relation" as "[o)ne
founded on trust or confidence reposed by one person in the integrity and fidelity of another." Id.
A "fiduciary relationship" exists when parties are under a duty to act or give advice for the
benefit of another upon matters within the scope of the trust relation and where a special confi-
dence is reposed in another who in equity and good conscience is bound to act in good faith and
with due regard to interests of one reposing confidence. See Lappas v. Barker, 375 S.W.2d 248,
251 (Ky. 1963). See also Williams v. Griffin, 35 Mich. App. 179, 181, 192 N.W.2d 283,285 (1971)
(Such relationship exists when there is a reposing of faith, confidence, and trust, and the placing of
reliance by one upon the judgment and advice of the other.). See infra notes 25, 26, & 53 and
accompanying text.
For commentary on fiduciary duty, see Langevoort, Insider Trading and the Fiduciary Princi-
ple: A Post-Chiarella Restatement, 70 CALIF. L. REV. I (1982); Loss, The Fiduciary Concept as
Applied to Trading by Corporate Insiders in the United States, 33 MOD. L. REV. 34 (1970); Ruder,
Current Developments in the Federal Law of Corporate Fiduciary Relations-Standing to Sue Under
Rule lOb-5, 26 Bus. LAW. 1289 (1971); Scott, The Fiduciary Principle, 37 CALIF. L. REV. 539
(1949). See also ALI-ABA COURSE OF STUDY, FRAUD AND FIDUCIARY DUTY UNDER THE FED-
ERAL SECURITIES LAWS 1-90 (1982).
10. Section 1O(b) and Rule IOb-5 are not violated unless the defendant acted with scienter,
defined by the United States Supreme Court as "a mental state embracing intent to deceive, ma-
nipulate or defraud." See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976) (scienter
required before a § lO(b) and a Rule IOb-5 defendant is liable in a private cause of action for
damages); see also Aaron v. SEC, 446 U.S. 680, 686 n.5 (1980) (scienter required before a § 1O(b)
defendant is liable, regardless of the nature of the proceedings and of the plaintiff); SEC v. Mac-
Donald, 699 F.2d 47, 50-51 (1st Cir. 1983) (en banc) (in Rule IOb-5 private actions and enforce-
ment actions, the plaintiff must prove scienter).
For commentary of the scienter requirement, see Bucklo, Scienter and Rule lOb-5, 67 Nw.
U.L. REV. 562 (1972); Walker, Accountants' Liability-The Scienter Standard Under Section lO(b)
and Rule lOb-5 ofthe Securities Exchange Act of1934,63 MARQ. L. REV. 243 (1979); Comment, A
Scienter Requirementfor SEC Injunctions Under Section lO(b)-lnvestor Protection Under the Se-
curities Laws is Further Restricted' Aaron v. SEC, 22 B.C.L. REV. 595 (1981); see also Annot., 49
A.L.R. FED. 392 (1980) (discussing what constitutes recklessness sufficient to show necessary ele-
ment of scienter in civil action for damages under § 1O(b) of the Securities Exchange Act of 1934
and Rule IOb-5 of the Securities and Exchange Commission); Annot., 20 A.L.R. FED. 227 (1974)
(discussing the element of scienter as affecting criminal prosecution for violation of federal securi-
ties laws).
II. See Dirks v. SEC, - U.S. - , -, 103 S. Ct. 3255, 3264 (1983).
12. Securities Act of 1933, ch. 38, § 1,48 Stat. 74 (1933) (codified as amended at 15 U.S.C.
§§ 77a to 77aa (1982».
The essential purpose of the Securities Act of 1933 is to protect investors by requiring publi-
cation of certain securities before they are offered for sale. See A.C. Frost & Co. v. Coeur
D'Alene Mines Corp., 312 U.S. 38 (1941); see also SEC v. Sunbeam Gold Mines Co., 95 F.2d 699
(9th Cir. 1938) (purpose of Securities Act of 1933 is to provide full and fair disclosure of character
1984] Comments 731

change Act of 1934.13 The 1934 Act was enacted by Congress to protect inves-
tors from fraud in the securities marketplace. 14 Section I O(b) of the 1934 Act
compels full and fair disclosurel 5 of material, non-public information in con-

of securities sold in interstate and foreign commerce and through the mails, and to prevent fraud
in sale thereof). See also infra note 64.
For commentary of the Securities Act of 1933, see generally 5 J. ELLENBERGER & E. MAHAR,
THE LEGISLATIVE HISTORY OF THE SECURITIES ACT OF 1933 AND SECURITIES EXCHANGE ACT OF
1934 (1973); Douglas & Bates, The Federal Securities Act of 1933, 43 YALE L.J. 171 (1933).
13. Securities Exchange Act of 1934, ch. 38, § 1,48 Stat. 881 (1934) (codified as amended at
15 U.S.c. §§ 78a to 78hh (1982». See also supra note 2.
Congress enacted the Securities Exchange Act of 1934 (The 1934 Act) to restore confidence in
the securities marketplace after the stockmarket crash of 1929. See Silver v. New York Stock
Exch., 373 U.S. 341, 366 (1963) (the Securities Exchange Act of 1934 was passed to control abuses
in the stock exchanges); see also 5 J. ELLENBERGER & E. MAHAR, supra note 12; Benstein, Re-
quired Disclosure and the Stock Market: An Evaluation o/the Securities Exchange Act of 1934, 63
AM. ECON. REV. 132 (1973); Loomis, The Securities Exchange Act of 1934 and the Investment
Advisors Act 0/ 1940, 28 GEO. WASH. L. REV. 214 (1959).
14. See 15 U.S.c. §§ 78a to 78hh (1982). The 1934 Act was enacted to remedy abuses in the
exchange markets, including specifically, improper transactions by officers, directors, and princi-
pal stockholders. See S. REP. No. 792, 73d Cong., 2d Sess. 9, 10 (1934); H.R. REP. No. 1383, 73d
Cong., 2d Sess. II, 13 (1934), reprinted in 5 J. ELLENBERGER & E. MAHAR, supra note 12, at item
17. See also Ernst & Ernst v. Hochfelder,425 U.S. 185, 194-214 (1976) (discussing the 1934 Act's
legislative history); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 848 n.9 (2d Cir. 1968) (en
banc), cert. denied, 394 U.S. 976 (1969) (Significant purpose of the 1934 Act was to eliminate the
idea that the use of inside information for personal advantage was a normal emolument of corpo-
rate office.).
A fundamental purpose, common to Securities Act of 1933 and Securities Exchange Act of
1934, was to substitute the philosophy of full disclosure for the philosophy of caveat emptor, and
thus achieve a higher standard of business ethics in the securities industry. See SEC v. Capital
Gains Research Bureau, Inc., 375 U.S. 180 (1963). But see First Nat'l City Bank v. Smith, 531
P.2d 321 (Okla. 1975) (Securities Act is concerned primarily with initial distributions of securities,
rather than subsequent trading, while Securities Exchange Act is directed primarily at post-distri-
bution of securities.).
15. See Bradford v. Harding, 108 F. Supp. 338, 339 (1952) ("Disclosure evokes a certain
subjective quality, namely that which is clear in the view of the average reader."); see also Hy-
draulic Press Mfg. Co. v. E.W. Bliss Co., 62 F. Supp. 476, 481 (1945) ("Disclosure means to make
known."); Leland Stanford Junior Univ. v. National Supply Co., 46 F. Supp. 389 (1942) (Stock-
holder was entitled to recover value of stock in action against consolidated corporation where
directors failed to make a "full and fair disclosure.").
The primary purpose of the statute was to outlaw the use of inside information by corporate
officers and principal stockholders for their own financial advantage to the detriment of unin-
formed public security holders. See 5 A. BROMBERG & L. LOWENFELS, SECURITIES FRAUD AND
COMMODITIES FRAUD § 7.4 (1983).
The SEC views the disclosure duty as requiring more than disclosure to purchasers or sellers.
See In re Faberge, Inc., 45 S.E.C. 249, 256 (1973) ("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."); see also Speed v. Transamerica Corp., 99 F. Supp. 808,
828-29 (D. Del. 1951). In Speed v. Transamerica Corp., Judge Leahy stated the applicable general
principles that create the duty of an insider to make disclosures of material, non-public informa-
tion in connection with the purchase or sale of securities:
It is unlawful for an insider, such as a majority stockholder, to purchaser the stock of
minority stockholders without disclosing material facts affecting the value of the stock,
known to the majority stockholder by virtue of his inside position but not known to the
selling minority stockholders, which information would have affected the judgment of
the sellers. The duty of disclosure stems from the necessity of preventing a corporate
insider from utilizing his position to take unfair advantage of the uninformed minority
stockholders. It is an attempt to provide some degree of equalization of bargaining posi-
tion in order that the minority may exercise an informed judgment in any such
transaction.
Id.
For commentary on the duty to disclose under the federal securities laws, see H. BLOOMEN-
THAL & S. WING, SECURITIES LAW § 1.16 (1973); 5 A. BROMBERG & L. LOWENFELS, supra at
§ 7.4; H. KRIPKE, THE SEC AND CORPORATE DISCLOSURE: REGULATION IN SEARCH OF A PUR-
732 Washburn Law Journal [Vol. 23

nection with the purchase or sale of securities. 16 In 1942, the Securities and
Exchange Commission (SEC) 17 promulgated administrative Rule lOb-5 under
§ lO(b) of the 1934 ACt. 18 Rule lOb-5 was designed to protect investors from
deceptive practices in connection with the purchase or sale of any security. 19
Section lO(b) and Rule lOb-5 have been interpreted as enjoining corporate

POSE 8-24 (1979); Anderson, The Disclosure Process in Federal Securities Regulation, 25 HASTINGS
L.J. 311 (1974); Fleischer, Mundheim, & Murphy, An Initial Inquiry into the Responsibility to Dis-
close Market In/ormation, 121 U. PA. L. REV. 798 (1973); Stevenson, The SEC and the New Disclo-
sure, 62 CORNELL L. REV. 50 (1976); Talesnick, Corporate Silence and Rule lOb-5: Does a Publicly
Held Corporation Have an Affirmative Obligation to Disclose?, 49 DEN. L.J. 369 (1973); see also
ALI-ABA COURSE OF STUDY, INTEGRATED DISCLOSURE AND PRIVATE PLACEMENT RULES, 143-
46 (1982). See also supra note I.
16. See 15 U.S.c. § 78b (1982). Provisions of § lO(b) of the Securities Exchange Act and
SEC Rule IOb-5 are not applicable exclusively to fraudulent acts or activities directed toward
inducing the purchase or sale of securities, but they make unlawful any such act or activity per-
formed "in connection with purchase or sale" of security. See Superintendant of Insurance v.
Bankers Life & Casualty Co., 404 U.S. 6 (1971). See also Reder, Measuring Buyers' Damages in
lOb-5 Cases, 31 Bus. LAW. 1839 (1976); Annot., 4 A.L.R. FED. 1048 (1970) (discussing what is a
purchase or sale of security within the antifraud provisions of § lO(b) of the Securities Exchange
Act of 1934 and SEC Rule IOb-5, promulgated thereunder); Annot., 22 A.L.R.3d 793 (1968) (dis-
cussing nondisclosure of information by insider to seller or purchaser of corporation's stock as a
manipulative or deceptive devise prohibited by § lO(b) of Securities Exchange Act).
17. The Securities and Exchange Commission (SEC) is composed of five members, not more
than three of whom may be members of the same political party. They are appointed by the
President, with the advice and consent of the Senate, for five-year terms, the terms being staggered
so that one expires on June 5 of each year. The Chairman is designated by the President. See H.
BLOOMENTHAL & S. WING, supra note 15, at § 1.10(2). The SEC is the federal agency which
administers such laws as the Securities Act of 1933, the Securities Exchange Act of 1934, the
Public Utility Holding Company Act of 1935. The Trust Indenture Act of 1939, the Investment
Advisers Act of 1940 and the Investment Company Act of 1940. See BLACK'S LAW DICTIONARY
1215 (rev. 5th ed. 1979).
For commentary on the Securities and Exchange Commission, see Dunton, Selected Bibliog-
raphy Including Legislative History o/the Securities and Exchange Commission and the Statutes it
Administers, 28 GEO. WASH. L. REV. App. I. (1959); Wolfson, A Critique 0/ the Securities and
Exchange Commission, 30 EMORY L.J. \19 (1981).
18. 17 C.F.R. § 240.l0b-5 (1983) 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 omit to state a material fact
necessary in order to make the statement made, in light of the circumstances under
which they were made, not misleading, 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.
/d.
Although the authority came from § lO(b), "the draftsmen turned their backs on the language
of that section and borrowed the words of § 17 of the Securities Act of 1933, simply broadening
these to include frauds on the seller as well as the buyer." SEC v. Texas Gulf Sulphur Co., 401
F.2d 833, 867 (2d Cir. 1968) (Friendly, J. concurring), cert. denied, 394 U.S. 976 (1969). The rule
was intended to give the Commission the power to deal with the problem of fraud in connection
with a purchase or sale of securities; it had no relation to private proceedings. See E. GADSBY,
THE FEDERAL SECURITIES EXCHANGE ACT OF 1934 § 5.03(1), at 27-28 (1977). See also Bahlman,
Rule lOb-5: The Case/or Its Full Acceptance as Federal Corporation Law, 37 U. CIN. L. REV. 727
(1968); Jacobs, The Impact 0/ Securities Exchange Act Rule lOb-5 on Broker-Dealers, 57 CORNELL
L. REV. 869 (1972).
19. See § 10, 48 Stat. 891 (1942) (codified as amended at 15 U.S.c. § 78j (1982) and 17
C.F.R. § 240.lOb-5 (1983».
SEC Rule IOb-5 is a general antifraud rule which covers a broad range of conduct and by its
term covers conduct specifically proscribed by the provisions of the federal securities statutes to
include § lO(b) of the Securities Exchange Act of 1934. See Om v. Eastman Dillion, Union Secur-
ity & Co., 364 F. Supp. 352 (C.D. Cal. 1973); see also SEC v. M.A. Lundy Assocs., 362 F. Supp.
1984] Comments 733

insiders 20 from trading in the corporation's securities on the basis of mate-

rial,21 non-public information22 about the company's business transactions
unless such information is first disclosed to the general public. 23 Any person

226 (D.R.I. 1973) (SEC Rule IOb-5 was designed to protect the public from deceitful or mislead-
ing statements or omissions in connection with purchase or sale of securities.).
The SEC created a private right of action by promulgating Rule IOb-5. See Note, The Reli-
ance Requirement in Private Actions Under SEC Rule IOb-5, 88 HARV. L. REV. 584, 584 n.l (1975).
For commentary on SEC Rule IOb-5, see Boone & McGowan, Standing to Sue Under SEC Rule
IOb-5, 49 TEX. L. REV. 617 (1971); Jacobs, The Measure of Damages in Rule IOb-5 Cases, 65 GEO.
L.J. 1093 (1977); Ruder & Coss, Limitations on Civil Liability Under Rule IOb-5, 1972 DUKE L.J.
1125; Note, The Measure of Damages in Rule IOb·5 Cases Involving Actively Traded Securities, 26
STAN. L. REV. 371 (1974); Comment, SEC Rule IOb-5: A Recent Profile, 13 WM. & MARY L. REV.
860 (1972); Comment, The Prospect for Rule X-IOb·5: An Emerging Remedy for Defrauded Inves-
tors, 59 YALE L.J. 1120 (1950).
20. The test for determining who is an "insider" is formulated in In re Cady, Roberts & Co.,
40 S.E.C. 907 (1961) and was adopted by the Second Circuit in SEC v. Texas Gulf Sulphur Co.,
401 F.2d 833 (2d Cir. 1968) (en banc), cert. denied, 394 U.S. 976 (1969). See also infra notes 34 &
72 and accompanying text.
An insider is a person who: (I) possesses inside information, (2) knows or should know the
information is non-public, and (3) receives the information in his business capacity and for a
legitimate business reason by virtue of a relationship giving access directly or indirectly to the
information. See 5 A. JACOBS, supra note 8, § 66.02[a] at 327. For commentary on insiders and
outsiders, see Brundy, Insiders, Outsiders, and Informational Advantages Under the Federal Securi-
ties Laws, 93 HARV. L. REV. 893 (1981); Galeno, Drawing the Line on Insiders and Outsidersfor
Rule IOb-5, 4 HARV. J.L. & PUB. POL'y 203 (1981).
21. In a case alleging violation of SEC Rule IOb-5, and involving primarily failure to dis-
close, it is necessary that facts withheld be material in the sense that reasonable investors might
consider them important in making their decisions. See Affiliated Ute Citizens v. United States,
406 U.S. 128, 153-54 (1972).
Material information is that information to which "a reasonable man would attach impor-
tance ... in determining his choice of action in the transaction in question." SEC v. Texas Gulf
Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968) (en banc), cert. denied, 394 U.S. 976 (1969) (quoting
List v. Fashion Park, Inc., 340 F.2d 457, 462 (2d Cir.), cert. denied, 382 U.S. 811 (1965»; See also
TSC Indus., Inc., v. Northway, Inc., 426 U.S. 438 (1976) (Information is material if a reasonable
investor would consider it important in making his or her decision.). See infra note 41.
The common law materiality test as stated in RESTATEMENT (SECOND) OF TORTS § 538
(1977) provides:
( I) Reliance upon a fraudulent misrepresentation is not justified unless the matter mis-
represented is material
(2) The matter is material if
(a) a reasonable man would attach importance to its existence or nonexistence in
determining his choice of action in the transaction in question; or
(b) the maker of the representation knows or has reason to know that its recipient
regards or is likely to regard the matter as important in determining his choice of action,
although a reasonable man would not so regard it.
/d.
For commentary on material information, see Kripke, Rule IOb-5 Liability and "Materia/"
''Facts'', 46 N.Y.U. L. REV. 1061 (1971); Wang, Trading on Material Nonpublic Information on
Impersonal Stock Markets: Who is Harmed, and Who Can Sue Whom Under SEC Rule IOb-5?, 54
S. CAL. L. REV. 1217 (1981); Note, Trading on Materia/' Non-public Information Under Rule J4e-J,
49 GEO. WASH. L. REV. 539 (1981).
22. See In re Merrill Lynch, Pierce, Fenner & Smith, Inc., 43 S.E.C. 933, 936 (1968) (Non-
public information is information intended to be available only for a corporate purpose and not
for the personal benefit of anyone.).
Non-public information refers to information that investors may not lawfully acquire and
information that, although lawfully disseminated, is not generally available to the public. See
Brundy, supra note 20, at 322 n.2; Christal & Zaken, supra note 8, at 514 n.8. For commentary on
trading on non-public information, see Morrison, Silence is Golden, Trading on Nonpublic Market
Information, 8 SEC. REG. L.J. 211 (1980); Painter,lnside Information: Growing Painsfor the Devel-
opment of Federal Corporation Low Under Rule IOb-5, 65 COLUM. L. REV. 1361 (1965); Peloso &
Krause, Trading on Inside Information, 14 REV. SEC. REG. 941 (1981).
23. The courts and the SEC theorized that any person with superior access to information
about a company, or about the market for the company's shares had a duty to disclose the mate-
rial information that he possessed. See Speed v. Transamerica Corp., 99 F. Supp. 808, 828-29 (D.
734 Washburn Law Journal [Vol. 23

with access to material, inside information about a company's securities, has a

duty to disclose the material information obtained or abstain from trading al-
together. 24 Accordingly, insider trading traditionally has been considered
misrepresentation. 25

Del. 1951) (Chief Judge Leahy established the applicable general principles that create the duty of
an insider to make disclosures of material, non-public information in connection with the
purchase of sale of securities.). See supra note 15. See also Ward La France Truck Corp., 13
S.E.C. 373 (1943) (the purchase of securities unaccompanied by appropriate disclosure of material
facts constituted a violation of Rule 1Ob-5); Fleischer, Mundheim, & Murphy, supra note 15;
Comment, A Market Insider Analysis 0/ Liability Under Section IO(b) and Rule IOb-5, 46 BROOK-
LYN L. REV. 103 (1980). But see Schoenbaum & Firstbrook, 268 F. Supp. 385 (S.D.N.Y. 1967)
(expressly rejected the general proposition that anyone buying with inside information, securities
of a corporation, has automatically violated Rule 1Ob-5).
24. See In re Cady, Roberts & Co., 40 S.E.C. 907, 911 (1961) (An affirmative duty to disclose
material information has been traditionally imposed on corporate "insiders," particularly officers,
directors, or controlling stockholders.).
Moreover, broker-dealers who effect securities transactions for an insider and who know that
the insider possesses non-public material information have an affirmative duty to make appropri-
ate disclosure or to dissasociate themselves from the transactions. See Hughes v. Treat, 22 S.E.C.
623,626 (1946). The court stated that "if in this case the facts showed that an insider, with full
knowledge or (an) ... offer, purchased from stockholders at prices substantially below. . . (the
market), without revealing the existence of the ... offer, he would be violating Section 1O(b) and
Rule X-1Ob-5 ..." Id. The court further stated that if (a buyer) with full knowledge of the facts,
acted on behalf of such insider and failed to make disclosure, (a buyer) would be a party to the
violation." Id. See also Fry v. Schumaker, 83 F. Supp. 476, 478 (E.D. Pa. 1947) (declaration of a
scheme to acquire plaintiff's stock at less than its real value by fraudulent representations suffi-
ciently stated a cause of action for common law fraud against the broker). But see Chiarella v.
United States, 445 U.S. 222, 235 (1980) (The possession of material inside information does not by
itself trigger the disclose or refrain rule; only when one comes into possession of material inside
information with a pre-existing or derivative fiduciary duty will the disclose or refrain rule apply.);
Hafner v. Forest Laboratories, Inc., 345 F.2d 167 (2d Cir. 1965) (corporation had not violated
§ 1O(b) by failing to inform attorney, who had been issued shares of corporation's stock in return
for services, and who later sold shares back to corporation, of market value of shares at time or
repurchase where current price information was available to public in National Daily Quotation
Sheets).
25. See Strong v. Repide, 213 U.S. 419 (1909) (holding a director who purchased securities of
the issuer through an agent without disclosing his identity or the company's intention to sell cer-
tain assets violated a duty to disclose such information to the selling shareholders). In Strong v.
Repide, the United States Supreme Court expanded the common law tort of misrepresentation to
those securities transactions situations in which "special facts" of the particular case resulted in a
duty to disclose. Id. at 430.
The "special facts" doctrine of Strong v. Repide was later extended in subsequent cases to
impose an obligation of affirmative disclosure on all corporate officers and directors when dealing
with shareholders. See Kardon v. National Gypsum Co., 73 F. Supp. 798, 800 (E.D. Pa. 1947)
(Corporate directors who negotiated a sale of corporate assets to a third party and then, without
disclosing such material fact, purchased the stock owned by private stockholders, for their own
benefit, were found to have violated § 100b) of the Securities Exchange Act of 1934.). See also
SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968) (en banc), cerl. denied, 394 U.S. 976
(1969) (establishing a judicial approval of Rule 10b-5 as creating a broad disclose or abstain rule).
See also In re Cady, Roberts & Co., 40 S.E.C. 907 (1961) (holding broker-dealer and partner who
executed orders to sell discretionary accounts, after being informed of a dividend reduction appli-
cable to such securities, but before public announcement, had willfully violated the antifraud
provisions of the Securities Act).
For commentary on insider trading and the federal securities laws, see generally H. MANNE,
INSIDER TRADING AND THE STOCK MARKET (1966). See also Branson, Discourse on the Supreme
. Court Approach to SEC Rule IOb-5 and Insider Trading, 30 EMORY L.J. 263 (1981); Cook & Feld-
man, Insider Trading Under the Securities Exchange Act, 66 HARV. L. REV. 385 (1953); Dooley,
Enforcement of Insider Trading Restrictions, 66 VA. L. REV. 1 (1980); Hazen, Corporate Insider
Trading: Reawakening the Common Low, 39 WASH. & LEE L. REV. 845 (1982); Manne, Insider
Trading and the Administrative Process, 35 GEO. WASH. L. REV. 473 (1967); Palkovitz, Rule IOb-5
Developments SEC Regulation on Insider Securl~ies Trading, 38 WASH. & LEE L. REV. 893 (1981);
Rasmussen, An Overview 0/ Insider Trading Lows in the United States, 9 INT'L Bus. LAW. 389
(1981); Scott, Insider Trading: Rule IOb-5, Disclosure, and Corporate Privacy, 9 J. LEGAL STUD.
SOl (1980); Wang, Recent Developments in Federal Low Regulating Stock Market Inside Trading, 6
1984] Comments 735

The law proscribing insider trading under § lO(b) and Rule IOb-5, has its
orgins in the common law concept of fiduciary duty.26 The primary purpose
of the statute and the rule was to outlaw the use of inside information by
corporate insiders and principle stockholders for their own financial advantage
to the detriment of uninformed minority stockholders. 27 The legislative intent
of the statute and the rule was to provide an equalization of bargaining posi-
tion, so that minority stockholders could exercise informed judgment in any
securities transaction. 28 Early decisions held that corporate insiders owed a
duty of trust to their shareholders to refrain from trading in the corporation's
securities based on material, non-public information obtained from their cor-
porate relationship.29
The doctrine establishing the disclose or abstain rule for open market
transactions was initially proposed by the SEC in In re Cady, Roberts & Co. 30
In Cady, Roberts & Co., a broker-dealer received information from a member
of the board of directors concerning the board's decision to reduce the com-
pany's dividends. 31 Prior to the public release of this information, the broker

CORP. L. REV. 291 (1983). For a discussion of the elements of common law fraud, see James &
Gray, Misrepresentation Part II, 37 MD. L. REV. 488, 523-27 (1978). See generally ALI-ABA,
COURSE OF STUDY: FRAUD, INSIDE INFORMATION, AND FIDUCIARY DUTY UNDER RULE IOb-5
(1976).
26. As a general rule, neither party to a business transaction has an obligation to disclose
information to the other unless the parties stand in some confidential or fiduciary relationship.
See W. PROSSER, HANDBOOK ON THE LAW OF TORTS § 106, at 695-98 (4th ed. 1971). See also
Hotchkiss v. Fisher, 136 Kan. 530, 16 P.2d 531 (1932) (corporate director who purchases a minor-
ity shareholder's shares, must act in a relationship of trust and confidence). But see Goodwin v.
Agassiz, 283 Mass. 358, 186 N.E. 659 (1933) (insider trading was not unlawful under common
law).
For commentary on common law fiduciary concept and § 1O(b) and Rule IOb-5, see Rosan-
tree, The Continuing Development of Rule lOb-5 as a Means of Enforcing the Fiduciary Duties of
Directors and Controlling Shareholders, 34 U. PITT. L. REV. 201 (1972); Comment, Corporations:
Expansion of the Common Law Fiduciary Concept Via lOb-5, 13 WASHBURN L.J. 534 (1974).
27. See Speed v. Transamerica Corp., 99 F. Supp. 808, 829 (D. Del. 1951) (parent corpora-
tion perpetrated fraud by showing incorrect value of stock in annual report, and failed to disclose
such information in offer to purchase minority shareholder's securities); see also Shapiro v. Merrill
Lynch, Pierce, Fenner & Smith, Inc., 495 F.2d 228, 235 (2d Cir. 1974) (information that an earn-
ings statement would be revised showing either a lower profit or loss was passed on to investors
who sold shares to the public before the information was publicly disclosed); Radiation Dynamics,
Inc., v. Goldmuntz, 464 F.2d 876, 890 (2d Cir. 1972) (action by seller of stock to recover damages,
where purchaser withheld material, inside information about the corporation); Annot., 7 A.L.R.3d
500 (1966) (discussing duty and liability of closely held corporation, its directors, officers, or ma-
jority stockholders, in acquiring stock of minority stockholders).
28. See Speed v. Transamerica Corp., 99 F. Supp. 808, 829 (D. Del. 1951). See also supra
notes 14-23 and accompanying text. For a commentary on the legislative history of the Securities
Acts, see generally J. ELLENBERGER & E. MAHAR, supra note 14.
29. See In re Cady, Roberts & Co., 40 S.E.C. 907, 911 (1961). "An affirmative duty to dis-
close material information has been traditionally imposed on corporate 'insiders,' particularly of-
ficers, directors, or controlling stockholders." Id. See i1ifra notes 30-36 and accompanying text.
Anyone who, trading for his own account in the securities of a corporation, may not take
advantage of inside information, knowing it is unavailable to the general public. See SEC v.
Texas Gulf Sulphur Co., 401 F.2d 833, 848 (2d Cir. 1968) (en banc), cert. denied, 394 U.S. 976
(1969). See infra notes 37-45 and accompanying text.
30. 40 S.E.C. 907 (1961).
31. Id. at 909. In Cady, Roberts & Co., on the morning of November 25, 1959 the Curtiss-
Wright directors, including Cowdin, then a registered representative of registrant and a board
member of Curtiss-Wright, met to consider the declaration of a quarterly dividend. The company
had paid a dividend, although not earned, of $.625 per share for each of the first three quarters of
1959. The Curtiss-Wright board, over the objections of the president and chairman of the board
who favored declaration of a dividend at the same rate as in the prior quarters, approved a divi-
736 Washburn Law Journal [Vol. 23

sold large numbers of the company's securities which he held in various ac-
counts.32 In an action against the broker, the SEC considered the duties of a
selling broker who received non-public information about a company's divi-
dend action from a director who was employed by the same brokerage firm.33
The SEC, finding a violation of § lO(b) and Rule lOb-5, held that an insider
will be liable under Rule lOb-5 34 for insider trading only where he fails to
disclose material, non-public information before trading on it and thus makes
"secret profits."35 The SEC also determined that an insider must abstain from
trading altogether, when disclosure prior to selling or purchasing a security
would be improper because of the individual's relationship to the issuer.36
The SEC's disclose or abstain rule was first given judicial recognition by

dend for the fourth quarter at the reduced rate of $.375 per share. Id. Sometime after the divi-
dend decision, there was a recess of the Curtiss-Wright directors' meeting, during which Cowdin
telephoned registrants' office and left a message for Gintel that the dividend had been cut. Id.
32. Id. at 909. At approximately 11:00 a.m., the Curtiss-Wright board authorized transmis-
sion of information on this action by telegram to the New York Stock Exchange. Due to a typing
problem, there was a short delay in the transmission of the telegram. The telegram was transmit-
ted to Western Union at 11:12 a.m., but was not delivered to the Exchange until 12:29 p.m. It had
also been customary for the company to notify the Dow Jones News Ticker Service of any divi-
dend action. The Wall Street Journal was not given the news until approximately 11:45 a.m., and
the announcement did not appear on the Dow Jones ticker tape until 11:48 a.m. Id.
Immediately upon receiving information that Curtiss-Wright would be cutting its regular div-
idend, Gintel entered two sell orders for execution on the Exchange, one to sell short 5,000 shares
of II accounts. Four hundred of the 5,000 shares were sold for three of Cowdin's customers. Id.
When the information was publicly released the price dropped quickly and substantially, and
the Exchange was compelled to suspend trading in Curtiss-Wright because of the large number of
sell orders. Id.
33. 40 S.E.C. at 907. The Securities and Exchange Commission instituted proceedings to
determine whether registrant Cady, Roberts & Co. and Gintel, the selling broker and partner of
the registrant, willfully violated the "antifraud" provisions of § I O(b) of the Securities Exchange
Act of 1934, Rule IOb-5 issued under the Act, and § 17(a) of the Securities Act of 1933. Id.
34. In Cady, Roberts & Co., the SEC explained why corporate insiders have special obliga-
tions and why failure to follow the disclosure rule constituted a IOb-5 violation. The SEC stated:
Analytically, the obligation rests on two principal elements; first, the existence of a rela-
tionship 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 know-
ing it is unavailable to those with whom he is dealing.
Id. at 912.
35. Id. at 911. The SEC began its analysis by noting that a duty has been traditionally im-
posed on insiders to disclose material information.
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. Failure
to make disclosure in these circumstances constitutes a violation of the anti-fraud
provisions.
Id.
The SEC then shifted from the disclosure duty to the concept of fiduciary duty. "[IJn the
circumstances, Gintel's relationship to his customers was such that he would have a duty not to
take a position adverse to them, not to take secret profits at their expense, not to misrepresent facts
to them, and in general to place their interests ahead of his own." Id. at 916 n.31. See generally
Comment, A New Concept of Fraud on the Securities Exchange-A Comment on In re Cady, Rob-
erts & Co., 15 S.c.L. REV. 557 (1963).
36. 40 S.E.c. at 911. The SEC explained the nature of the insider's duty to abstain from
trading due to the individual relationship to the issuer by stating, "[iJf, on the other hand, disclo-
sure prior to effecting a purchase or sale would be improper or unrealistic under the circum-
stances, we believe the alternative is to forego the transaction." I d.
The SEC sought to identify those persons who are in a special relationship with a company
and who had privity to its internal affairs, and because of such relationship suffer correlative
duties in trading in its securities. Id. See generally Comment, Insider Liabllity Under Securities
Exchange Act Rule lOb-5: rhe Cady, Roberts Doctrine, 30 U. CHI. L. REV. 121 (1962).
1984] Comments 737

the United States Court of Appeals for the Second Circuit in SEC v. Texas
Gulf Sulphur CO.37 In Texas Gulf Sulphur, company officials who had inside
information about the corporation's recent copper strike bought Texas Gulf
Sulphur stock prior to public disclosure of the discovery.38 The SEC instituted
an action charging the corporation and individual defendants with violations
of§ lO(b) and Rule lOb-5. 39 On appeal,40 the Second Circuit affirmed that the
discovery of the ore concentration was material information41 and that by
trading in the corporation's securities prior to public disclosure of that infor-
mation, the defendants violated § lO(b) and Rule lOb-5. 42 In so holding, the

37. 401 F.2d 833 (2d Cir. 1968) (en banc), cert. denied, 394 U.S. 976 (1969).
38. Id. at 843-44. In Texas Gu!! Sulphur, a substantial discovery of copper and mineral de-
posits was made in Canada, and company officials sought to keep the information regarding the
potential find confidential so Texas Gulf Sulphur (TGS) could acquire mineral rights for the
adjoining areas.
When rumors began to circulate, TGS issued a press release falsely indicating that the reports
of the find were greatly overstated. Id. at 845. Throughout the period from the original discovery
until a second press release announcing that TGS had made a great strike, insiders and their
tippees purchased TGS stock without disclosing information regarding the discovery. Id. at 847.
39. SEC v. Texas Gulf Sulphur Co., 258 F. Supp. 262 (S.D.N.Y. 1966). The SEC instituted
the action charging the Texas Gulf Sulphur Company and thirteen individual defendants with
violations of§ lO(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and Rule IOb-5, 17 C.F.R.
§ 240.10b-5, promulgated thereunder by the Commission. All the parties waived a jury and
agreed that a trial should be held first on the issue of whether the defendants or any individual
defendant had violated § lO(b) and Rule IOb-5, reserving for later hearing the issue of the remedy
to be applied in the event such violations are found. Id. at 267.
. The United States District Court for the Southern District of New York found that two of the
thirteen individual defendants had violated § 1O(b) and Rule IOb-5, but otherwise the Commis-
sion's complaint was ordered dismissed. Id. at 296.
40. See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (1968) (en banc), cert. denied, 394 U.S.
976 (1969). Appeals from the United States District Court for the Southern District of New York
were taken by the SEC and by the two individual defendants who were found to have violated
§ lO(b) and Rule IOb-5. The appeals were argued before a division of the court consisting of three
judges. On May 2, 1968, it was ordered that the case should be considered en banc upon the
record and briefs that the parties had filed and upon the opinions that had been prepared and
distributed by the three judge panel. Id. at 833.
41. Id. at 852. The court stated, "[Ilnasmuch, as the visual evaluation of that drill core (a
generally reliable estimate though less accurate than a chemical assay) constituted material infor-
mation, those advised of the results of the visual evaluation as well as those informed of the '
chemical assay traded in violation of law." Id.
The court explained that material information includes any fact which might affect the price
of a company's stock and to which a reasonable man would attach importance in deciding
whether he should buy, sell, or hold his securities. 401 F.2d at 850.
The test of materiality previously had included facts which might be significant to any pur-
chaser or buyer. Id. It subsequently was narrowed so that in § 10(b) actions, material informa-
tion includes only facts which would have actual significance to a buyer's or seller's decision to
effectuate a securities transaction. See TCS Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449
(1976). See also supra note 21.
See also Cary,lnsider Trading in Stocks, 21 Bus. LAW. 1009, 1010 (1966); Fleischer, Securities
Trading and Corporation Information Practices: The Implications of the Texas Gu!! Sulphur Pro-
ceeding, 51 VA. L. REV. 1271, 1277-80 (1965).
42. 401 F.2d at 852. The court in Texas Gu!! Sulphur commenced its analysis of insider
trading and Rule IOb-5 by stating:
Whether predicated on traditional fiduciary concepts or on the "special facts" doctrine
[Rule lOb-51 is based in policy on the justifiable expectation of the securities marketplace
that all investors trading on impersonal exchanges have relatively equal access to mate-
rial information. . . . The essence of the Rule is that anyone who, trading for his own
account in the securities of a corporation has "access, directly or indirectly, to informa-
tion intended to be available only for a corporate purpose and not for the personal bene-
fit of anyone" may not take "advantage of such information knowing it is unavailable to
those with whom he is dealing" i.e., the investing public.
Id. (citations omitted).
738 Washburn Law Journal [Vol. 23

Second Circuit adopted the SEC's disclose or abstain rule 43 and expanded the
parameters of the insider trading doctrine by extending the disclose or abstain
duty to tippees. 44 The court stressed that tippees who trade have the same

The information theory provides that in any transaction in which one of the parties has re-
ceived information. the other investors should have equal access to that information. See Shapiro
v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 495 F.2d 228, 235 (2d Cir. 1974) (The Second
Circuit utilized the information theory which holds that all investors should have equal access to
reve\ant market information.).
Texas Gulf Sulphur fundamentally changed the insider trading doctrine under the federal
securities laws. The court contended that the duty imposed by Rule IOb-5 is owed to the investing
public as a whole, not just the existing shareholders, consistent with the court's perception that
Congress intended all investors in the market place to have equal access to information material to
intelligent investment decisions. 401 F.2d at 848-49. See supra notes 18 & 19 for a discussion of
Rule IOb-5.
43. 401 F.2d at 848. The Second Circuit shifted the focus on insider trading liability from
fiduciary duty to a theory of possession, by declaring:
[A]nyone in possession of material, inside information must either disclose it to the in-
vesting public, or if he is disabled from disclosing it in order to protect a corporate confi-
dence, or he chooses not to do so, must abstain from trading in or recommending the
securities concerned while such information remains undisclosed.
Id. (quoting In re Cady, Roberts & Co., 40 S.E.C. 907, 911 (1961». See supra notes I & 15.
44. Id. at 852-53. The Second Circuit embraced the concept of tipper liability, indicating
that any person who provides material, non-public information to others may be in violation of
Rule IOb-5, even if he himself did not trade. The court suggested that informing others who trade
is sufficient, and in that event both the tipper and the tippee could incur liability under Rule lOb-
S. Id. See supra note 8 for a discussion on tippees and tippee liability.
The Texas Gulf Sulphur approval for broad tippee liability was extended even further by the
SEC in In re Investors Management Co. Inc., 44 S.E.C. 633 (\971). An administrative proceeding
against Merrill Lynch and its various institutional clients who sold large holdings of Douglas
Aircraft stock on the basis of non-public information received from Merrill Lynch, a prospective
underwriter for Douglas debentures that a forth coming quarterly report would show substantially
reduced earnings and earning estimates, was brought by the SEC.
In Investors Management, unlike Texas Gulf Sulphur, the defendants were true\y tippees, with
no relationship of trust or confidence with the source. Id. at 637. The SEC rejected the defend-
ant's contention that they were neither insiders nor had a special relationship with an inside cor-
porate source giving them access to non-public information stating that:
[o]ne who obtains possession of material non-pUblic corporate information, which he has
reason to know emanates from a corporate source, and by which itself places him in a
position superior to other investors, thereby requires a relationship with respect to that
information within the purview and restraints of the antifraud provisions.
!d. at 644.
Other courts have held that both "tippers" and "tippees" can be held liable for violations of
Rule IOb-5. See Shapiro v. Merrill Lynch, Pierce, Fenner & Smith Inc., 495 F.2d 228, 237-38 (2d
Cir. 1974) ("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 came from a corporate
insider.); Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 887 (2d Cir. 1972) (One in pos-
session of material inside information, be he an insider or a tippee, "must either disclose. . . or
... abstain from trading ...") (quoting SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 848 (2d
Cir. 1968) (en banc), cert. denied, 394 U.S. 976 (\969».
The extension of liability to tippees is consistent with earlier cases because these outsiders
were deemed to have entered into a fiduciary relationship with the corporation and its sharehold-
ers. See Kardon v. National Gypsum Co., 73 F. Supp. 798, 800 (E.D. Pa. 1947). In Kardon the
court indicated that § lO(b) and Rule IOb-5 apply to directors and officers who, in purchasing the
stock of the corporation from others, fail to disclose a fact coming to their knowledge by reason of
their position which would materially affect the judgment of the other party to the transaction.
See also Chiarella v. United States, 445 U.S. 222, 230 n.12 (1980) (The Court discussed the tip-
pee's obligation by stating, "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.") (quoting Subcommittee 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 REP. No. 233, at D-l, D-2 (Jan. 2, 1974». Ross V. Licht, 263 F. Supp. 395, 410 (S.D.N.Y.
1967) (The court observed, "If [defendants] were not insiders, they would seem to have been
'tippees' ... and subject to the same duty as insiders."); In re Cady, Roberts & Co., 40 S.E.c. 907
1984] Comments 739

duty as corporate insiders, because even when disclosure of the information to

the securities marketplace is impossible, the tippee can still abstain from trad-
ing until the information is disclosed to the public. 45
The United Supreme Court addressed the insider trading issue for the
first time in Chiarella v. United States. 46 The Court reversed a conviction
under § lO(b) of a financial printer who traded on the basis of confidential
information about impending tender offers47 which was gained in the course
of his employment. 48 In reviewing the conviction, the Court considered
whether a buyer's silence49 could constitute a manipulative or deceptive device
under § lO(b) and Rule lOb-5. 5o The Court examined the legislative history of

(\ 961 ) (corporate insiders breached their fiduciary duty to investors by trading on inside
information).
45. 401 F.2d at 852-53. For commentary on the Texas Gulf Sulphur case, see Bromberg,
Corporate In/ormation: Texas Gulf Sulphur and its Implications, 22 Sw. L.l. 731 (1968); Fleischer,
Securities Trading and Corporate In/ormation Practices: the Implications 0/ the Texas Gulf Sulphur
Proceedings, 51 VA. L. REV. 1271 (\965); Kennedy & Wander, Texas Gulf Sulphur, A Most Unu-
sual Case, 20 Bus. LAW. 1057 (\965); Ruder, Texas Gulf Sulphur-The Second Round' Privity and
State 0/Mind in Rule lOb-5 Purchase and Sale Cases, 63 Nw. U.L. REV. 423 (1968); Ruder, Corpo-
rate Disclosures Required by the Federal Securities Laws: The Codification Implications 0/ Texas
Gulf Sulphur, 61 Nw. U. L. REV. 872 (1967).
46. 445 U.S. 222 (\980).
47. BLACK'S LAW DICTIONARY 1316 (rev. 5th ed. 1979) defines a tender offer as:
[a]n offer to purchase shares made by one company direct to the shareholders of another
company, sometimes subject to a minimum and or a maximum that the offeror will ac-
cept, communicate to the shareholders by means of newspaper advertisements and (if the
offeror can obtain the shareholders list, which is not often unless it is a friendly tender)
by a general mailing to the entire list of shareholders, with a view to acquiring control of
the second company. Used in an effort to go around the management of the second
company, which is resisting acquisition.
Id.
A tender offer typically takes the form of an offer to purchase up to a given number of shares
of a corporation at a specified cash price generally above the prevailing market price within a
limited period of time. It is a means of acquiring a large block of stock in a corporation and is
generally a part of a takeover attempt. See H. BLOOMENTHAL & S. WING, supra note 15, at
~ 3.13[3].
48. Vincent Chiarella, an employee of Pandick Press, a company engaged in printing corpo-
rate takeover bids, determined from coded documents the identity of corporations targeted for
takeover by the printing company's customers. 445 U.S. at 224. Without disclosing his informa-
tion, Chiarella purchased stock in the targeted corporations and sold the shares for $30,000 profit
after announcement of the tender offers. Id.
The U.S. Attorney for the Southern District of New York criminally prosecuted Chiarella for
an intentional violation of SEC Rule IOb-5 and § 10(b) of the Exchange Act. See United States v.
Chiarella, 450 F. Supp. 95 (S.D.N.Y. 1978). The United States District Court for the Southern
District of New York held that the indictment sufficiently alleged a criminal violation of the stat-
ute prohibiting the use of manipulative and deceptive devices in connection with the sale or
purchase of securities. Id. at 97.
Chiarella appealed his conviction to the United States Court of Appeals for the Second Cir-
cuit. The Second Circuit affirmed. See United States v. Chiarella, 558 F.2d 1358 (2d Cir. 1978).
The United States Supreme Court granted certiorari. Chiarella v. United States, 441 U.S. 942
(\979).
49. 445 U.S. at 225 n.5. The Court was concerned with the petitioner's silence. The Court
noted that only Rules IOb-5(a) and (c) were at issue, because Rule IOb-5(b) requires an untrue
statement to be made, and the petitioner made no statements in connection with the purchase of
stock. See supra note 18.
50. Id. at 226. The Court stated that "[i]n order to decide whether silence in such circum-
stances violates § lO(b), it is necessary to review the language and legislative history of the statute
as well as its interpretation by the Commission and the federal courts." Id.
See Kerbs v. Fall River Indus., Inc., 502 F.2d 731 (10th Cir. 1974) (person may be liable as
aider and abettor in securities fraud action even though his assistance to scheme consisted of mere
silence or inaction). But see Cleary v. Perfectune, Inc., 700 F.2d 774 (1st Cir. 1983) (Defendants
may not be held liable as aiders or abettors under § I O(b) for failure to disclose they were improp-
740 Washburn Law Journal [Vol. 23

§ lO(b) and Rule lOb-5 and noted the relationship between silence and fraud
under the federal securities laws was never addressed in the statute or the
rule. 51 The Court concluded that § lO(b) and Rule lOb-5 contain no special
prohibition against non-disclosure of inside information, rather the statute and
the rule prohibit misrepresentation. 52 The Court held that a duty to disclose
material, non-public information under § lO(b), or to abstain from trading
under Rule lOb-5 only arises where there is a fiduciary duty53 or other rela-
tionship of trust and confidence. 54

erly named by principle as directors in offering memorandum where plaintiff failed to allege or
prove any facts from which it may be inferred defendants' inaction was to promote principal's
fraud.).
51. 445 U.S. at 226. The Court noted that after an inquiry into a legislative history of the
statute as developed in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197 (1976) the question of
whether silence may constitute a manipulative or deceptive device remains unanswered.
Chief Justice Burger in his dissent indicated that silence may constitute a manipUlative or
deceptive device under § lO(b) and Rule IOb-5. Chief Justice Burger stated:
The history of the statute and of the rule also supports this reading. The antifraud provi-
sions 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 Congo
2d Sess., 6 (1934). An investor who purchases securities on the basis of misappropriated
non-pUblic 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.
Id. at 241 (Burger, C.J. dissenting).
See 15 U.S.c. § 78j(b) (1982). Section lO(b), the principle antifraud provision of the Securi-
ties Exchange Act of 1934, proscribes the use of manipulative devices and the making of false and
misleading statements to stimulate investments. See supra note 2.
See 17 C.F.R. § 240.10b-5 (1983). Rule IOb-5 also prohibits the use of manipulative and
deceptive devices and the making of any untrue statements of material fact. See supra note 18.
Section lO(b) refers only to the employment of a manipulative or contrivance device in con-
nection with the purchase or sale of any security. See supra note 2. Rule IOb-5 refers both to the
employment of any "device, scheme or artifice to defraud," and to the "making of untrue state-
ments of material facts and ommissions of material facts necessary in order to make the state-
ments made ... not misleading." See supra note 18.
Early decisions of the courts and the SEC determined that an implied misrepresentation re-
sulting from a failure to disclose material information may be considered a manipulative or de-
ceptive device. See Speed v. Transamerica Corp., 99 F. Supp. 808, 829 (D. Del. 1951) (The court
rejected the defendant's contention that only expressed misrepresentation or half-truths are un-
lawful, stating that "an implied misrepresentation is just as fraudulent as an express one and
constitutes an untrue statement of a material fact within the meaning of the governing rule."). See
also In re Cady, Roberts & Co., 40 S.E.C. 907 (1961) (Failure to make disclosure constitutes a
violation of the antifraud provisions of the federal securities laws.). Bul see Chiarella v. United
States, 445 U.S. 222, 232 (1980) (There is no explicit statutory language prohibiting total non-
disclosure or silence, and neither the statute, the rule nor the legislative history indicates whether
silence constitutes a manipulative or deceptive device.).
For commentary on prohibition or manipulative or deceptive devices in securities transac-
tions, see Annot., 22 A.L.R.3d 793 (1968); Annot., 3 A.L. R. FED. 294 (1970) (discussing acquisi-
tion by corporate insider of corporation's stock as manipulative or deceptive device prohibited by
§ lO(b) of the 1934 Act).
52. 445 U.S. at 227-28. The Court noted that misrepresentation made for the purpose of
inducing reliance upon the false statement is fraudulent at common law. However, the Court
emphasized that one who fails to disclose material information prior to purchasing or selling se-
curities commits fraud only when he is under a duty to do so. Id. at 228. See supra note 25. For
commentary on common law misrepresentation, see Keeton, Actionable Misrepresentation, 2
OKLA. L. REV. 56 (1949).
53. See supra notes 9, 25, & 26.
54. 445 U.S. at 228. See also infra note 57 and accompanying text. For commentary on
Chiarella v. Uniled Slales, see Cann, A Duty 10 Disc/ose? An Analysis 0/ Chiarella v. United States,
85 DICK. L. REV. 249 (1981); Deutsch, Chiarella v. Uniled Stales: A Sludy in Legal Style, 58 TEX.
L. REV. 1291 (1980).
1984] Comments 741

The Chiarella decision ended the judicial expansion in the circuit courts
of insider trading liability based on either the possession55 or informational
equality theories. 56 Chiarella made it clear that Rule lOb-5 imposes a duty to
disclose or abstain only on a party to a transaction who has a relationship of
trust and confidence with the other party. 57 In Dirks v. SEC,58 the United
States Supreme Court reaffirms its holding in Chiarella 59 and further defines
insider trading liability, by clarifying the nature of the relationship requiring a
disclosure duty and how such duty is breached. 6o Dirks, an investment ana-
lyst of insurance company securities, was informed by a former officer of an
insurance company that the company was involved in a massive fraud. 61 The
informant provided Dirks with detailed allegations, as well as names of cur-
rent and former employees who could verify the fraudulent practices. 62 Dirks
proceeded to verify these allegations, but before the information became pub-
lic, Dirks informed certain of his clients, who sold shares in the company
before it went into receivership.63 The SEC censured Dirks after an adminis-

55. 445 U.S. at 235. For a discussion on the possession theory prior to Chiarella, see supra
note 24. The Court holds "that a duty to disclose under § 1O(b) does not arise from mere posses-
sion of non-public information." 445 U.S. at 235.
56. /d. at 233 n.16. The Court indicates that § 1O(b) and Rule IOb-5 do not prescribe an
equality-of-information test. For an analysis of the equality-of-information test, see Speed v.
Transamerica Corp., 99 F. Supp. 808, 828-29 (D. Del. 1951) (One major function the equality-of-
information test was thought to serve, was to insure equal access to material information and an
equalization of bargaining power.). The Court in Chiarella, criticized the district court's jury in-
structions, stating that "[i)n effect, the trial court instructed the jury that petitioner owed a duty to
everyone; to all sellers, indeed, to the market as a whole." 445 U.S. at 231. See also supra notes 15
& 23 and accompanying text.
57. 445 U.S. at 228 (quoting RESTATEMENT (SECOND) OF TORTS, § 55 I (2)(a) (1976». See
also Morgan, The Insider Trading Rules After Chiarella: Are They Consistent with Statutory Pol-
icy?, 33 HASTINGS L.J. 1407 (1982).
58. - U.S. -, 103 S. Ct. 3255 (1983).
59. 445 U.S. 222 (1980).
60. - U.S. -, 103 S. Ct. 3255 (1983).
6!. Id. at - n.l, 103 S. Ct. at 3258 n.!. Dirks was employed as a securities analyst with a
New York broker-dealer firm, Delafield Childs, Inc. who specialized in providing investment
analysis of insurance company securities to institutional investors. On March 6, 1973 Dirks re-
ceived information from Ronald Secrist, a former employee of a life insurance company acquired
by Equity Funding Corporation of America (EFCA). Secrist told Dirks that EFCA had created
false insurance policy files and records to inflate its sales files. According to Secrist, EFCA had
been creating false insurance files since 1970. Management hoped the sales of false policies would
generate cash flow, maintain an impressive growth rate and boost the value of EFCA stock. See
21 S.E.C. Docket 1401, 1402-06 (1981) (facts of case related in opinion of the Securities and Ex-
change Commission); see a/so Dirks v. SEC, 681 F.2d 824, 829-33 (D.C. Cir. 1982) (facts related in
detail in the opinion of Judge Wright in the D.C. Court of Appeals).
62. See SEC v. Dirks, 21 S.E.C. Docket 1401, 1403 (1981).
63. - U.S. at -, 103 S. Ct. at 3258. Dirks visited EFCA headquarters in Los Angeles and
interviewed several officers and employees of the corporation. Throughout the investigation,
Dirks openly discussed the information he obtained with a number of clients, investors, and ana-
lysts, some because he hoped they might give him information or support, others because they
were clients and his records showed they were interested in information about Equity Funding,
and still others because having heard rumors about his investigation, they called him. On all
occasions Dirks candidly discussed the status of his investigation with anyone who asked. See
Dirks v. SEC, 681 F.2d 824, 831 (D.C. Cir. 1982).
Some of the persons informed by Dirks sold their holdings of EFCA securities, including five
investment advisors who liquidated holdings of more than $16 million dollars. During the two
week period in which word of Dirk's investigation spread, the price of EFCA stock fell from $26
per share to less than $15 per share. This lead the New York Stock Exchange to halt trading on
March 27. Soon after California insurance authorities impounded EFCA records and uncovered
evidence of fraud. EFCA immediately went into receivership. Id.
Dirks received from his firm a salary, plus a commission for securities transactions above a
742 Washburn Law Journal [Vol. 23

trative law judge found the discriminate disclosure of inside information con-
stituted aiding and abetting in violation of § 17(a) of the Securities Act of
193364 and § 1O(b) of the Securities Exchange Act of 1934 and Rule lOb-5. 65
On certiorari,66 the United States Supreme Court considers whether a tip-
pee can violate Rule lOb-5 by disclosing non-public information received from
insiders of a corporation with which he had no affiliation. 67 The Court holds
that a tippee does not inherit an insider's fiduciary duty to the shareholders of
a corporation not to trade on non-public information, unless 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. 68
The Court begins its analysis by restating the elements for establishing an
insider trading violation under rule lOb-5. 69 The Court notes that the federal
securities laws impose no general duty to disclose material, non-public infor-
mation, and emphasizes that the disclosure duty arises from the existence of a
fiduciary relationship and not from mere possession of the information. 70 The
Court states that a Rule lOb-5 violation involves a breach of a fiduciary duty,

certain amount that his clients directed through his firm. See 21 S.E.C. Docket at 1402 n.3. But
"[i)t is not clear how many of those with whom Dirks spoke promised to direct some brokerage
business through [Dirk's firm) to compensate Dirks, or how many actually did so." - U.S. at -,
103 S. Ct. at 3258 n.2 (citations omitted).
64. 15 U.S.c. § 77q(a) (1982). Section 17(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 or transportation or communication in interstate commerce or by
the use of the mails, directly or indirectly-(I) 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 ommission 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.
Id.
See supra note 12. For discussion of § 17(a), see Horton, Section 17(a) of the 1933 Securities
Act-The Wrong Placefor a Private Right, 68 Nw. U.L. REV. 44 (1973); Note, Punitive Damages
Under § 17(a) of the Securities Act of 1933, 11 B.C. INDUS. & COM. L. REV. 1031 (1970); Note,
Section 17(a) of the 1933 Securities Act: An Alternative to the Recently Restricted Rule 10b-5, 9
RUT.-CAM. L.J. 340 (1978); Comment,lmplied Civil Remedies Under § 17(a) ofthe Securities Act of
1933,53 B.U.L. REV. 70 (1973); Comment, Punitive Damages Under § 17(a) of the 1933 Securities
Act, 1970 U. ILL. L. F. See also Annot., I A.L.R. FED. 1007 (1969) (discussing recovery of puni-
tive damages by buyers of securities in civil action prohibiting the sale of securities through fraud-
ulent means or misleading statements).
65. See supra notes 2 & 4. See also Comment, Establishment of Liabilityfor Aiding and Abet-
ting Fraud Under Rule 10b-5 and the Common Law, 25 UCLA L. REV. 862 (1978); Comment,
Dirks v. SEe: Increased Exposure to Rule 10b-5 Liabilityfor Broker-Dealers, 51 U. CIN. L. REV.
849 (1982); Comment, Whistle Blowing as a Rule 10b-5 Violation: Dirks v. SEC, 36 U. MIAMI L.
REV. 987 (1982).
66. - U.S. -, 103 S. Ct. 371 (1982).
67. - U.S. -, -, 103 S. Ct. 3255, 3258 (1983). The Court stated, ''The question is whether
Dirks violated the antifraud provisions of the federal securities laws by this disclosure." Id.
68. Id. at -, 103 S. Ct. at 3264.
69. Id. at -, 103 S. Ct. at 3260. The Court stated:
In Chiarella, we accepted the two elements set out in Cady, Roberts for establishing a
Rule IOb-5 violation: "(i) the existence of a relationship affording access to inside infor-
mation 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, 100 S. Ct. at 1114.
Id.
70. - U.S. at -, 103 S. Ct. at 3261 (quoting Chiarella v. United States, 445 U.S. 222, 227-35
(1980).
1984] Comments 743

and that the breach must involve manipulation or deception. 7l The Court
then explains that such fraud derives from the unfairness of allowing a corpo-
rate insider to take personal advantage of information available only for a
corporate purpose and making secret profits by trading without disclosure. 72
The SEC's argument that any person who receives material, non-public
information from an insider inherits a fiduciary duty to disclose it, was dis-
missed by the Court as being a mirror image of the equality of information
motion rejected by the Court in Chiarella .73 The Court points out that a tip-
pee's duty to disclose is derivative from the insider's duty.74 The Court holds
that without a finding that the tippee knows or has reason to know not only
that the information is material and non-public, but also that the information
is improperly disclosed by an insider in breach of his fiduciary duty to the
corporation and shareholders, there can be no derivative tippee liability.75
The Court stresses that not every breach of fiduciary duty by corporate
insiders is actionable under § 1O(b).76 Whether the tip is a breach of duty
under § lO(b) depends upon the insider's purpose in making the disclosure,77
and whether there will be direct or indirect personal benefit to the insider,
derived from his disclosure. 78 The Court explains that such benefit may either
result from the insider's personal gain, or future earnings formulated from a
reputational benefit. 79 The Court concludes that Dirks had not violated Rule
lOb-5 because he was a stranger to the corporation, and he did not place him-
self in a relationship of trust or confidence with the shareholders. 80 The Court

71. See Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 473-74 (1977). "Thus the claim offraud
and fiduciary breach in this complaint states a cause of action under any part of Rule IOb-5 only if
the conduct alleged can be fairly viewed as manipulative or deceptive within the meaning of the
statute." /d.
72. - U.S. at -, 103 S. Ct. at 3261 (quoting /n re Merrill Lynch, Pierce, Fenner & Smith,
Inc., 43 S.E.C. 933, 936 (1968». In an insider trading case this fraud derives from the "inherent
unfairness involved where one takes advantage" or "information intended to be available only for
a corporate purpose and not for the personal benefit of anyone." /d. See also /n re Cady, Roberts
& Co., 40 S.E.C. 906, 916 n.31 (1961) (An insider will be liable under Rule IOb-5 for inside trading
only where he fails to disclose material, non-public information before trading on it and thus
makes "secret profits."). See also supra note 20 & 35.
73. - U.S. at - n.16, 103 S. Ct. 3262 n.16. The Court notes that the SEC's theory of tippee
liability appeared to be rooted in the belief that the antifraud provisions required equal informa-
tion among all traders. The Court states that "[t]his conflicts with the principle set forth in
Chiarella and that only some persons, under some circumstances, will be barred from trading
while in possession of material, non-public information." /d.
74. - U.S. at -, 103 S. Ct. at 326. "Unless the insiders breached their Cady, Roberts duty to
the shareholders in disclosing the non-public information to Dirks, he breached no duty when he
passed it onto investors as well as the Wall Street Journal." /d. The Court further relates that
"[a]bsent a breach by the insider, there is no derivative breach." /d. at - n.22, 103 S. Ct. at 3265
n.22.
75. /d. at - n.19, 103 S. Ct. at 3264 n.19. Some tippees must assume an insider'S duty to the
shareholders not because they received inside information but because of the improper way it was
made available to them. /d.
76. /d. at -, 103 S. Ct. at 3264. Only those insider's disclosure that violate his Cady, Roberts
disclosure duty are improper for purpose of Rule IOb-5.
77. /d. at -, 103 S. Ct. at 3265.
78. /d. at -, 103 S. Ct. at 3266.
79. /d. The Court considers 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.
80. /d. at -, 103 S. Ct. at 3266. The Court states, "It is undisputed that Dirks himself was a
stranger to Equity Funding, with no pre-existing fiduciary duty to its shareholders." /d.
744 Washburn Law Journal [Vol. 23

further notes that the insider did not breach a duty to the shareholders by
disclosing material, non-public information to Dirks, because the insider did
not benefit directly or indirectly from the disclosure and he was motivated by
a desire to expose fraud. 81
The dissent 82 argues that the insider violated his duty to the company
shareholders by transmitting material, non-public information to a tippee with
the intention that the tippee would cause his clients to trade on that informa-
tion. 83 The dissent criticizes the majority holding by claiming that the case
excuses knowing and intentional violations of an insider's duty to the share-
holders, when the insider's act is not motivated by personal gain. 84 The dis-
sent also argues that a shareholder's injury is not eradicated by the fact that
the insider himself does not benefit from the breach. 85
In Dirks v. SEC,86 the Court reaffirms that a duty to disclose under
§ lO(b) of the Securities Exchange Act of 1934 does not arise from mere pos-
session of non-public market information. 87 The Court limits insider trading
liability to insiders and those tippees to whom they improperly disclose mate-
rial non-public information for personal benefit.88 The Court holds that an
insider may disclose material, non-public information without incurring liabil-
ity under Rule lOb-5 when he receives or seeks no personal benefit. 89 The
Court also holds that a tippee may trade on material, non-public information
only if the insider did not breach his fiduciary duty to the shareholders by
disclosing it, or the tippee has no reason to know of such breach.9o Thus,
Dirks makes it clear that lOb-5 liability will not be found without an insider's
breach of fiduciary duty to the corporation and its shareholders. 91

Robert A. Anderson

81. Id. at -, 103 S. Ct. at 3267-68. The Court found that the tippers received no monetary or
personal benefit for revealing Equity Fundings' secrets, and their purpose was not to make a gift
of valuable information to Dirks, but rather it was to expose fraud. Id.
82. - U.S. -, -, 103 S. Ct. 3255, 3268 (1983) (Brennan, J., Marshall, J., joining Blackmun,
J., dissenting).
83. Id. at -, 103 S. Ct. at 3268 (Brennan, J., Marshall, J., joining Blackmun, J., dissenting).
84. Id. at -, 103 S. Ct. at 3268 (Brennan, J., Marshall, J., joining Blackmun, J., dissenting).
But see id. at -, 103 S. Ct. at 3268. (The facts of the case clearly indicated to the Court that the
tipper was motivated by the proper desire to expose fraud.).
85. Id. at - n.9, 103 S. Ct. at 3271 n.9 (Brennan, J., Marshall, J., joining Blackmun, J.,
dissenting).
86. - U.S. -, 103 S. Ct. 3255 (1983).
87. See United States v. Chiarella, 445 U.S. 222, 232 (1980).
88. - U.S. at - , 103 S. Ct. at 3266. The Court noted that whether an insider benefits per-
sonally from a particular disclosure is a question of fact, and will not always be easy for the courts
to determine. Id.
89. Id. The Court stated, urAls for rule IOb-5 purposes, the insider disclosure is improper
only where it would violate his Cady, Roberts duty." Id.
90. Id. at -, 103 S. Ct. at 3264. The Court states:
Thus, a tippee assumes a fiduciary duty to the shareholders of a corporation not to trade
on material, non-public 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 at breach.
Id.
91. Id. at -, 103 S. Ct. at 3264. For a discussion of Dirks v. SEC, see Block & Barton,
Securities Litigation: Insider Trading-the Need Jor Legislation, 10 SEC. REG. L.J. 350, 355-57
(1983); Wang, supra note 25, at 327-28. See also ALI-ABA COURSE OF STUDY, THE NEW FACE
OF INSIDER TRADING: CHIARELLA, DIRKS, AND BEYOND 239-391 (1983).