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Dirks v. SEC (full text) :: 463 U.S. 646 (1983) :: Justia U.S. Supreme Court Center Log In
› Dirks v. SEC
U.S. Supreme CourtDirks v. SEC, 463 U.S. 646 (1983)Dirks v. SECNo. 82-276Argued March 21, 1983Decided July 1, 1983463 U.S. 646CERTIORARI TO THE UNITED STATES COURT OF APPEALS
1. Two elements for establishing a violation of § 10(b) and Rule 10b-5 by corporate insiders are the existence of a relationship affording access to inside information intended to be available only for a corporate purpose, and the unfairness of allowing a corporate insider to take advantage Page 463 U. S. 647 of that information by trading without disclosure. A duty to disclose or abstain does not arise from the mere possession of nonpublic market information. Such a duty arises rather from the existence of a fiduciary relationship. Chiarella v. United States, 445 U. S. 222. There must also be "manipulation or deception" to bring a breach of fiduciary duty in connection with a securities transaction within the ambit of Rule 10b-5. Thus, an insider is liable under the Rule for inside trading only where he fails to disclose material nonpublic information before trading on it, and thus makes secret profits. Pp. 463 U. S. 653-654.
2. Unlike insiders who have independent fiduciary duties to both the corporation and its shareholders, the typical tippee has no such relationships. There must be a breach of the insider's fiduciary duty before the tippee inherits the duty to disclose or abstain. Pp. 463 U. S. 654-664.
(a) The SEC's position that a tippee who knowingly receives nonpublic material information from an insider invariably has a fiduciary duty to disclose before trading rests on the erroneous theory that the antifraud provisions require equal information among all traders. 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. Pp. 463 U. S. 655-659.
(b) A tippee, however, is not always free to trade on inside information. His duty to disclose or abstain is derivative from that of the insider's duty. 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. 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. Pp. 463 U. S. 659-661.
(c) In determining whether a tippee is under an obligation to disclose or abstain, it is necessary to determine whether the insider's "tip" constituted a breach of the insider's fiduciary duty. Whether disclosure is a breach of duty depends in large part on the personal benefit the insider receives as a result of the disclosure. Absent an improper purpose, there is no breach of duty to stockholders. And absent a breach by the insider, there is no derivative breach. Pp. 463 U. S. 661-664.
3. Under the inside-trading and tipping rules set forth above, petitioner had no duty to abstain from use of the inside information that he obtained, and thus there was no actionable violation by him. He had no preexisting fiduciary duty to the insurance company's shareholders. Moreover, the insurance company's employees, as insiders, did not violate Page 463 U. S. 648 their duty to the company's shareholders by providing information to petitioner. In the absence of a breach of duty to shareholders by the insiders, there was no derivative breach by petitioner. Pp. 463 U. S. 665-667.
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. 463 U. S. 667.
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. [Footnote 1] On Page 463 U. S. 649 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.
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. [Footnote 2]
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 Page 463 U. S. 650 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, [Footnote 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. [Footnote 4]
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 § 17(a) of the Securities Act of 1933, 48 Stat. 84, as amended, 15 U.S.C. § 77q(a), [Footnote 5] § 10(b) of the Securities Page 463 U. S. 651 Exchange Act of 1934, 48 Stat. 891, 15 U.S.C. § 78j(b), [Footnote 6] and SEC Rule 10b-5, 17 CFR § 240.10b-5 (1983), [Footnote 7] by repeating the allegations of fraud to members of the investment community who later sold their Equity Funding stock. The SEC concluded:
21 S.E.C. Docket 1401, 1407 (1981) (footnote omitted) (quoting Chiarella v. United States, 445 U. S. 222, 445 U. S. 230, n. 12 (1980)). Recognizing, however, that Dirks "played an important role in bringing [Equity Funding's] massive fraud Page 463 U. S. 652 to light," 21 S.E.C. Docket at 1412, [Footnote 8] the SEC only censured him. [Footnote 9]
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. Page 463 U. S. 653
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. [Footnote 10] The SEC found that not only did breach of this common law duty also establish the elements of a Rule 10b-5 violation, [Footnote 11] but that individuals other than corporate insiders could be obligated either to disclose material nonpublic information [Footnote 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 Page 463 U. S. 654 by trading without disclosure."
445 U.S. at 445 U. S. 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, [Footnote 13] and held that "a duty to disclose under § 10(b) does not arise from the mere possession of nonpublic market information." Id. at 445 U. S. 235. Such a duty arises, rather, from the existence of a fiduciary relationship. See id. at 445 U. S. 227-235.
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, 430 U. S. 472 (1977). There must also be "manipulation or deception." Id. at 430 U. S. 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.
We were explicit in Chiarella in saying that there can be no duty to disclose where the person who has traded on inside information
445 U.S. at 445 U. S. 232. Not to require such a fiduciary relationship, we recognized, would "depar[t] radically from the established doctrine that duty arises from a specific relationship between Page 463 U. S. 655 two parties," and would amount to
Id. at 445 U. S. 232, 445 U. S. 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. [Footnote 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.
"In tipping potential traders, Dirks breached a duty which he had assumed as a result of knowingly receiving Page 463 U. S. 656 confidential information from [Equity Funding] insiders. Tippees such as Dirks who receive nonpublic, 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."
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
"[a]nyon -- 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. [Footnote 15] Page 463 U. S. 657
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. [Footnote 16] Judge Wright correctly read our opinion in Chiarella as repudiating any notion that all traders must enjoy equal information before trading:
220 U.S.App.D.C. at 322, 681 F.2d at 837. See Chiarella, 445 U.S. at 445 U. S. 235, n. 20. We reaffirm today that
"[a] duty [to disclose] Page 463 U. S. 658 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 445 U. S. 231-232, n. 14.
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. [Footnote 17] It is commonplace for analysts to "ferret out and analyze information," 21 S.E.C. Docket at 1406, [Footnote 18] and this often is done by meeting with and questioning corporate officers and others who are insiders. And information that the analysts Page 463 U. S. 659 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.
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. § 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, 341 U. S. 272 (1951). See Jackson v. Smith, 254 U. S. 586, 254 U. S. 589 (1921); Jackson v. Ludeling, 21 Wall. 616, 88 U. S. 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 341 U. S. 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 445 U. S. 246, n. 1 (BLACKMUN, J., dissenting). As we noted in Chiarella,
Id. at 445 U. S. 230, n. 12. Page 463 U. S. 660
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. [Footnote 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. [Footnote 20] As Commissioner Smith perceptively observed Page 463 U. S. 661 in In re Investors Management Co., 44 S.E.C. 633 (1971):
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. [Footnote 21]
In determining whether a tippee is under an obligation to disclose or abstain, it this is necessary to determine whether the insider's "tip" constituted a breach of the insider's fiduciary duty. All disclosures of confidential corporate information Page 463 U. S. 662 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, 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. [Footnote 22] As Commissioner Smith stated in Investors Management Co.:
"It is important in this type of Page 463 U. S. 663 case to focus on policing insiders and what they do . . . rather than on policing information per se and its possession. . . ."
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. [Footnote 23] But to determine whether the disclosure itself "deceive[s], manipulate[s], or defraud[s]" shareholders, Aaron v. SEC, 446 U. S. 680, 446 U. S. 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 Page 463 U. S. 664 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.
Determining whether an insider personally benefits from a particular disclosure, a question of fact, will not always be easy for courts. But it is essential, we think, to have a guiding principle for those whose daily activities must be limited and instructed by the SEC's inside trading rules, and we believe that there must be a breach of the insider's fiduciary duty before the tippee inherits the duty to disclose or abstain. In contrast, the rule adopted by the SEC in this case would have no limiting principle. [Footnote 24] Page 463 U. S. 665
Under the inside trading and tipping rules set forth above, we find that there was no actionable violation by Dirks. [Footnote 25] It is undisputed that Dirks himself was a stranger to Equity Funding, with no preexisting fiduciary duty to its shareholders. [Footnote 26] He took no action, directly or indirectly, that induced the shareholders or officers of Equity Funding to repose trust or confidence in him. There was no expectation by Dirks' sources that he would keep their information in confidence. Nor did Dirks misappropriate or illegally obtain the information about Equity Funding. Unless the insiders breached their Cady, Roberts duty to shareholders in disclosing the nonpublic information to Dirks, he breached no duty when he passed it on to investors as well as to the Wall Street Journal. Page 463 U. S. 666
It is clear that neither Secrist nor the other Equity Funding employees violated their Cady, Roberts duty to the corporation's shareholders by providing information to Dirks. [Footnote 27] Page 463 U. S. 667 The tippers received no monetary or personal benefit for revealing Equity Funding's secrets, nor was their purpose to make a gift of valuable information to Dirks. As the facts of this case clearly indicate, the tippers were motivated by a desire to expose the fraud. See supra at 463 U. S. 648-649. In the absence of a breach of duty to shareholders by the insiders, there was no derivative breach by Dirks. See n 20, supra. Dirks therefore could not have been "a participant after the fact in [an] insider's breach of a fiduciary duty." Chiarella, 445 U.S. at 445 U. S. 230, n. 12.
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
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.
JUSTICE BLACKMUN's dissenting opinion minimizes the role Dirks played in making public the Equity Funding fraud. See post at 463 U. S. 670 and 463 U. S. 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").
Section 15 of the Securities Exchange Act, 15 U.S.C. § 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. § 78ff(a) (1976 ed., Supp. V) (providing criminal penalties).
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 §§ 848, 900 (rev. ed.1975 and Supp.1982); 3A id. §§ 1168.1, 1168.2 (rev. ed.1975). In holding that breaches of this duty to shareholders violated the Securities Exchange Act, the Cady, Robert Commission recognized, and we agree, that
See 40 S.E.C. at 912, n. 15.
In re Faherge, Inc., 45 S.E.C. 249, 256 (1973).
See 445 U.S. at 445 U. S. 233; id. at 445 U. S. 237 (STEVENS, J., concurring); id. at 445 U. S. 238-239 (BRENNAN, J., concurring in judgment); id. at 445 U. S. 239-240 (BURGER, C.J., dissenting). Cf. id. at 445 U. S. 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").
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.
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 disclose or abstain. The SEC fails to explain, however, why the receipt of nonpublic 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, "[i]t is clear that § 10(b) and Rule 10b-5, by their terms and by their history, make no such distinction." 445 U.S. at 445 U. S. 241, n. 1 (dissenting opinion). See ALI, Federal Securities Code § 1603, Comment (2)(j) (Prop. Off. Draft 1978).
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 445 U. S. 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 § 11(a)(1) of the Securities Exchange Act, 15 U.S.C. § 78k(a)(1), against members of a national securities exchange trading for their own account. See id. at 445 U. S. 233, n. 16. We observed in Chiarella that
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).
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.
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 nonpublic 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).
3 L. Loss, Securities Regulation 1451 (2d ed.1961) (quoting Restatement of Restitution § 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, § 167, p. 7-4 (rev. ed.1980) ("[T]he 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 § 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").
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.
Scienter -- "a mental state embracing intent to deceive, manipulate, or defraud," Ernst & Ernst v. Hochfelder, 425 U. S. 185, 425 U. S. 193-194, n. 12 (1976) -- is an independent element of a Rule 10b-5 violation. See Aaron v. SEC, 446 U. S. 680, 446 U. S. 695 (1980). Contrary to the dissent's suggestion, see post at 463 U. S. 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 425 U. S. 199. The issue in this case, however, is not whether Secrist or Dirks acted with scienter, but rather whether there was any deceptive or fraudulent conduct at all, i.e., whether Secrist's disclosure constituted a breach of his fiduciary duty and thereby caused injury to shareholders. See n 27, infra. Only if there was such a breach did Dirks, a tippee, acquire a fiduciary duty to disclose or abstain.
Dirks contends that he was not a "tippee," because the information he received constituted unverified allegations of fraud that were denied by management and were not "material facts" under the securities laws that required disclosure before trading. He also argues that the information he received was not truly "inside" information, i.e., intended for a confidential corporate purpose, but was merely evidence of a crime. The Solicitor General agrees. See Brief for United States as Amicus Curiae 22. We need not decide, however, whether the information constituted "material facts," or whether information concerning corporate crime is properly characterized as "inside information." For purposes of deciding this case, we assume the correctness of the SEC's findings, accepted by the Court of Appeals, that petitioner was a tippee of material inside information.
Judge Wright found that Dirks acquired a fiduciary duty by virtue of his position as an employee of a broker-dealer. See 220 U.S.App.D.C. at 325-327, 681 F.2d at 840-842. The SEC, however, did not consider Judge Wright's novel theory in its decision, nor did it present that theory to the Court of Appeals. The SEC also has not argued Judge Wright's theory in this Court. See Brief for Respondent 21, n. 27. The merits of such a duty are therefore not before the Court. See SEC v. Chenery Corp., 332 U. S. 194, 332 U. S. 196-197 (1947).
Brief for Respondent 31. This perceived "duty" differs markedly from the one that the SEC identified in Cady, Roberts and that has been the basis for federal tippee-trading rules to date. In fact, the SEC did not charge Secrist with any wrongdoing, and we do not understand the SEC to have relied on any theory of a breach of duty by Secrist in finding that Dirks breached his duty to Equity Funding's shareholders. See App. 250 (decision of Administrative Law Judge) ("One who knows himself to be a beneficiary of nonpublic, selectively disclosed inside information must fully disclose or refrain from trading"); Record, SEC's Reply to Notice of Supplemental Authority before the SEC 4 ("If Secrist was acting properly, Dirks inherited a duty to [Equity Funding]'s shareholders to refrain from improper private use of the information"); Brief for SEC in No. 81-1243 (CADC), pp. 47-50; id. at 51 ("[K]nowing possession of inside information by any person imposes a duty to abstain or disclose"); id. at 52-54; id. at 55 ("[T]his obligation arises not from the manner in which such information is acquired . . ."); 220 U.S.App.D.C. at 322-323, 681 F.2d at 837-838 (Wright, J.).
Post at 463 U. S. 678-679. By perceiving a breach of fiduciary duty whenever inside information is intentionally disclosed to securities traders, the dissenting opinion effectively would achieve the same result as the SEC's theory below, i.e., mere possession of inside information while trading would be viewed as a Rule 10b-5 violation. But Chiarella made it explicitly clear that there is no general duty to forgo market transactions "based on material, nonpublic information." 445 U.S. at 445 U. S. 233. Such a duty would "depar[t] radically from the established doctrine that duty arises from a specific relationship between two parties." Ibid. See supra at 463 U. S. 654-655.
Moreover, to constitute a violation of Rule 10b-5, there must be fraud. See Ernst & Ernst v. Hochfelder, 425 U.S. at 425 U. S. 199 (statutory words "manipulative," "device," and "contrivance . . . connot[e] intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities") (emphasis added). There is no evidence that Secrist's disclosure was intended to or did in fact "deceive or defraud" anyone. Secrist certainly intended to convey relevant information that management was unlawfully concealing, and -- so far as the record shows -- he believed that persuading Dirks to investigate was the best way to disclose the fraud. Other efforts had proved fruitless. Under any objective standard, Secrist received no direct or indirect personal benefit from the disclosure.
The dissenting opinion focuses on shareholder "losses," "injury," and "damages," but in many cases there may be no clear causal connection between inside trading and outsiders' losses. In one sense, as market values fluctuate and investors act on inevitably incomplete or incorrect information, there always are winners and losers; but those who have "lost" have not necessarily been defrauded. On the other hand, inside trading for personal gain is fraudulent, and is a violation of the federal securities laws. See Dooley, supra, n 21, at 39-41, 70. Thus, there is little legal significance to the dissent's argument that Secrist and Dirks created new "victims" by disclosing the information to persons who traded. In fact, they prevented the fraud from continuing and victimizing many more investors.
The Court today takes still another step to limit the protections provided investors by § 10(b) of the Securities Exchange Page 463 U. S. 668 Act of 1934. [Footnote 2/1] See Chiarella v. United States, 445 U. S. 222, 445 U. S. 246 (1980) (dissenting opinion). The device employed in this case engrafts a special motivational requirement on the fiduciary duty doctrine. This innovation excuses a knowing and intentional violation of an insider's duty to shareholders if the insider does not act from a motive of personal gain. Even on the extraordinary facts of this case, such an innovation is not justified.
As the Court recognizes, ante at 463 U. S. 658, n. 18, the facts here are unusual. After a meeting with Ronald Secrist, a former Equity Funding employee, on March 7, 1973, App. 226, petitioner Raymond Dirks found himself in possession of material nonpublic information of massive fraud within the company. [Footnote 2/2] In the Court's words, "[h]e uncovered . . . startling information that required no analysis or exercise of judgment as to Page 463 U. S. 669 its market relevance." Ibid. In disclosing that information to Dirks, Secrist intended that Dirks would disseminate the information to his clients, those clients would unload their Equity Funding securities on the market, and the price would fall precipitously, thereby triggering a reaction from the authorities. App. 16, 25, 27.
Dirks complied with his informant's wishes. Instead of reporting that information to the Securities and Exchange Commission (SEC or Commission) or to other regulatory agencies, Dirks began to disseminate the information to his clients and undertook his own investigation. [Footnote 2/3] One of his first steps was to direct his associates at Delafield Childs to draw up a list of Delafield clients holding Equity Funding securities. On March 12, eight days before Dirks flew to Los Angeles to investigate Secrist's story, he reported the full allegations to Boston Company Institutional Investors, Inc., which on March 15 and 16 sold approximately $1.2 million of Equity securities. [Footnote 2/4] See id. at 199. As he gathered more Page 463 U. S. 670 information, he selectively disclosed it to his clients. To those holding Equity Funding securities, he gave the "hard" story -- all the allegations; others received the "soft" story -- a recitation of vague factors that might reflect adversely on Equity Funding's management. See id. at 211, n. 24.
No one questions that Secrist himself could not trade on his inside information to the disadvantage of uninformed shareholders and purchasers of Equity Funding securities. See Brief for United States as Amicus Curiae 19, n. 12. Unlike the printer in Chiarella, Secrist stood in a fiduciary relationship Page 463 U. S. 671 with these shareholders. As the Court states, ante at 463 U. S. 653, corporate insiders have an affirmative duty of disclosure when trading with shareholders of the corporation. See Chiarella, 445 U.S. at 445 U. S. 227. This duty extends as well to purchasers of the corporation's securities. Id. at 445 U. S. 227, n. 8, citing Gratz v. Claughton, 187 F.2d 46, 49 (CA2), cert. denied, 341 U.S. 920 (1951).
The Court also acknowledges that Secrist could not do by proxy what he was prohibited from doing personally. Ante at 463 U. S. 659; Mosser v. Darrow, 341 U. S. 267, 341 U. S. 272 (1951). But this is precisely what Secrist did. Secrist used Dirks to disseminate information to Dirks' clients, who in turn dumped stock on unknowing purchasers. Secrist thus intended Dirks to injure the purchasers of Equity Funding securities to whom Secrist had a duty to disclose. Accepting the Court's view of tippee liability, [Footnote 2/5] it appears that Dirks' knowledge of this breach makes him liable as a participant in the breach after the fact. Ante at 463 U. S. 659, 463 U. S. 667; Chiarella, 445 U.S. at 445 U. S. 230, n. 12.
The Court holds, however, that Dirks is not liable because Secrist did not violate his duty; according to the Court, this is so because Secrist did not have the improper purpose of personal gain. Ante at 463 U. S. 662-663, 463 U. S. 666-667. In so doing, the Court imposes a new, subjective limitation on the scope of the duty owed by insiders to shareholders. The novelty of this limitation is reflected in the Court's lack of support for it. [Footnote 2/6] Page 463 U. S. 672
The insider's duty is owed directly to the corporation's shareholders. [Footnote 2/7] See Langevoort, Insider Trading and the Fiduciary Principle: A Post-Chiarella Restatement, 70 Calif.L.Rev. 1, 5 (1982); 3A W. Fletcher, Cyclopedia of the Law of Private Corporations § 1168.2, pp. 288-289 (rev. ed.1975). As Chiarella recognized, it is based on the relationship of trust and confidence between the insider and the shareholder. 445 U.S. at 445 U. S. 228. That relationship assures the shareholder that the insider may not take actions that will harm him unfairly. [Footnote 2/8] The affirmative duty of disclosure protects Page 463 U. S. 673 against this injury. See Pepper v. Litton, 308 U. S. 295, 308 U. S. 307, n. 15 (1939); Strong v. Repide, 213 U. S. 419, 213 U. S. 431-434 (1909); see also Chiarella, 445 U.S. at 445 U. S. 228, n. 10; cf. Pepper, 308 U.S. at 308 U. S. 307 (fiduciary obligation to corporation exists for corporation's protection).
The fact that the insider himself does not benefit from the breach does not eradicate the shareholder's injury. [Footnote 2/9] Cf. Restatement (Second) of Trusts § 205, Comments c and d (1959) (trustee liable for acts causing diminution of value of trust); 3 Page 463 U. S. 674 A. Scott, Law of Trusts § 205, p. 1665 (3d ed.1967) (trustee liable for any losses to trust caused by his breach). It makes no difference to the shareholder whether the corporate insider gained or intended to gain personally from the transaction; the shareholder still has lost because of the insider's misuse of nonpublic information. The duty is addressed not to the insider's motives, [Footnote 2/10] but to his actions and their consequences on the shareholder. Personal gain is not an element of the breach of this duty. [Footnote 2/11] Page 463 U. S. 675
This conclusion is borne out by the Court's decision in Mosser v. Darrow, 341 U. S. 267 (1951). There, the Court faced an analogous situation: a reorganization trustee engaged two employee-promoters of subsidiaries of the companies being reorganized to provide services that the trustee considered to be essential to the successful operation of the trust. In order to secure their services, the trustee expressly agreed with the employees that they could continue to trade in the securities of the subsidiaries. The employees then turned their inside position into substantial profits at the expense both of the trust and of other holders of the companies' securities.
The Court acknowledged that the trustee neither intended to, nor did in actual fact benefit, from this arrangement; his motives were completely selfless and devoted to the companies. Id. at 341 U. S. 275. The Court, nevertheless, found the trustee liable to the estate for the activities of the employees he authorized. [Footnote 2/12] The Court described the trustee's defalcation as "a willful and deliberate setting up of an interest in employees adverse to that of the trust." Id. at 341 U. S. 272. The breach did not depend on the trustee's personal gain, and his motives in violating his duty were irrelevant; like Secrist, the trustee intended that others would abuse the inside information for their personal gain. Cf. Dodge v. Ford Motor Co., 204 Mich. 459, 506-509, 170 N.W. 668, 684-685 (1919) (Henry Ford's philanthropic motives did not permit him to Page 463 U. S. 676 set Ford Motor Company dividend policies to benefit public at expense of shareholders).
As Mosser demonstrates, the breach consists in taking action disadvantageous to the person to whom one owes a duty. In this case, Secrist owed a duty to purchasers of Equity Funding shares. The Court's addition of the bad-purpose element to a breach of fiduciary duty claim is flatly inconsistent with the principle of Mosser. I do not join this limitation of the scope of an insider's fiduciary duty to shareholders. [Footnote 2/13]
The improper purpose requirement not only has no basis in law, but it also rests implicitly on a policy that I cannot accept. The Court justifies Secrist's and Dirks' action because the general benefit derived from the violation of Secrist's duty to shareholders outweighed the harm caused to those Page 463 U. S. 677 shareholders, see Heller, Chiarella, SEC Rule 14e-3 and Dirks: "Fairness" versus Economic Theory, 37 Bus.Lawyer 517, 550 (1982); Easterbrook, Insider Trading, Secret Agents, Evidentiary Privileges, and the Production of Information, 1981 S.Ct.Rev. 309, 338 -- in other words, because the end justified the means. Under this view, the benefit conferred on society by Secrist's and Dirks' activities may be paid for with the losses caused to shareholders trading with Dirks' clients. [Footnote 2/14]
Although Secrist's general motive to expose the Equity Funding fraud was laudable, the means he chose were not. Moreover, even assuming that Dirks played a substantial role in exposing the fraud, [Footnote 2/15] he and his clients should not profit from the information they obtained from Secrist. Misprision of a felony long has been against public policy. Branzburg v. Hayes, 408 U. S. 665, 408 U. S. 696-697 (1972); see 18 U.S.C. § 4. A person cannot condition his transmission of information of a crime on a financial award. As a citizen, Dirks had at least an ethical obligation to report the information to the proper authorities. See ante at 463 U. S. 661, n. 21. The Court's holding is deficient in policy terms not because it fails to create a legal Page 463 U. S. 678 norm out of that ethical norm, see ibid., but because it actually rewards Dirks for his aiding and abetting.
Dirks and Secrist were under a duty to disclose the information or to refrain from trading on it. [Footnote 2/16] I agree that disclosure in this case would have been difficult. Ibid. I also recognize that the SEC seemingly has been less than helpful in its view of the nature of disclosure necessary to satisfy the disclose-or-refrain duty. The Commission tells persons with inside information that they cannot trade on that information unless they disclose; it refuses, however, to tell them how to disclose. [Footnote 2/17] See In re Faberge, Inc., 45 S.E.C. 249, 256 (1973) (disclosure requires public release through public media designed to reach investing public generally). This seems to be a less than sensible policy, which it is incumbent on the Commission to correct. The Court, however, has no authority to remedy the problem by opening a hole in the congressionally mandated prohibition on insider trading, thus rewarding such trading.
See, e.g., Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723 (1975); Ernst & Ernst v. Hochfelder, 425 U. S. 185 (1976); Piper v. ChrisCraft Industries, Inc., 430 U. S. 1 (1977); Chiarella v. United States, 445 U. S. 222 (1980); Aaron v. SEC, 446 U. S. 680 (1980). This trend frustrates the congressional intent that the securities laws be interpreted flexibly to protect investors, see Affiliated Ute Citizens v. United States, 406 U. S. 128, 406 U. S. 151 (1972); SEC v. Capital Gains Research Bureau, Inc., 375 U. S. 180, 375 U. S. 186 (1963), and to regulate deceptive practices "detrimental to the interests of the investor," S.Rep. No. 792, 73d Cong., 2d Sess., 18 (1934); see H.R.Rep. No. 1383, 73d Cong., 2d Sess., 10 (1934). Moreover, the Court continues to refuse to accord to SEC administrative decisions the deference it normally gives to an agency's interpretation of its own statute. See, e.g., Blum v. Bacon, 457 U. S. 132 (1982).
Unknown to Dirks, Secrist also told his story to New York insurance regulators the same day. App. 23. They immediately assured themselves that Equity Funding's New York subsidiary had sufficient assets to cover its outstanding policies and then passed on the information to California regulators who in turn informed Illinois regulators. Illinois investigators, later joined by California officials, conducted a surprise audit of Equity Funding's Illinois subsidiary, id. at 87-88, to find $22 million of the subsidiary's assets missing. On March 30, these authorities seized control of the Illinois subsidiary. Id. at 271.
In the same administrative proceeding at issue here, the Administrative Law Judge (ALJ) found that Dirks' clients -- five institutional investment advisers -- violated § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 CFR § 240.10b-5 (1983), by trading on Dirks' tips. App. 297. All the clients were censured, except Dreyfus Corporation. The ALJ found that Dreyfus had made significant efforts to disclose the information to Goldman, Sachs, the purchaser of its securities. Id. at 299, 301. None of Dirks' clients appealed these determinations. App. to Pet. for Cert. B-2, n. 1.
The Court's implicit suggestion that Dirks did not gain by this selective dissemination of advice, ante at 463 U. S. 649, n. 2, is inaccurate. The ALJ found that, because of Dirks' information, Boston Company Institutional Investors, Inc., directed business to Delafield Childs that generated approximately $25,000 in commissions. App.199, 204-205. While it is true that the exact economic benefit gained by Delafield Childs due to Dirks' activities is unknowable because of the structure of compensation in the securities market, there can be no doubt that Delafield and Dirks gained both monetary rewards and enhanced reputations for "looking after" their clients.
The Court cites only a footnote in an SEC decision and Professor Brudney to support its rule. Ante at 463 U. S. 663-664. The footnote, however, merely identifies one result the securities laws are intended to prevent. It does not define the nature of the duty itself. See n. 9, infra. Professor Brudney's quoted statement appears in the context of his assertion that the duty of insiders to disclose prior to trading with shareholders is in large part a mechanism to correct the information available to noninsiders. Professor Brudney simply recognizes that the most common motive for breaching this duty is personal gain; he does not state, however, that the duty prevents only personal aggrandizement. Insiders, Outsiders, and Informational Advantages Under the Federal Securities Laws, 93 Harv.L.Rev. 322, 345-348 (1979). Surely, the Court does not now adopt Professor Brudney's access-to-information theory, a close cousin to the equality-of-information theory it accuses the SEC of harboring. See ante at 463 U. S. 655-658.
The Court correctly distinguishes this duty from the duty of an insider to the corporation not to mismanage corporate affairs or to misappropriate corporate assets. Ante at 463 U. S. 653, n. 10. That duty also can be breached when the insider trades in corporate securities on the basis of inside information. Although a shareholder suing in the name of the corporation can recover for the corporation damages for any injury the insider causes by the breach of this distinct duty, Diamond v. Oreamuno, 24 N.Y.2d 494, 498, 248 N.E.2d 910, 912 (1969); see Thomas v. Roblin Industries, Inc., 520 F.2d 1393, 1397 (CA3 1975), insider trading generally does not injure the corporation itself. See Langevoort, Insider Trading and the Fiduciary Principle: A Post-Chiarella Restatement, 70 Calif.L.Rev. 1, 2, n. 5, 28, n. 111 (1982).
As it did in Chiarella, 445 U.S. at 445 U. S. 226-229, the Court adopts the Cady, Roberts formulation of the duty. Ante at 463 U. S. 653-654.
In re Cady, Roberts & Co., 40 S.E.C. 907, 912 (1961) (footnote omitted). The first element -- on which Chiarella's holding rests -- establishes the type of relationship that must exist between the parties before a duty to disclose is present. The second -- not addressed by Chiarella -- identifies the harm that the duty protects against: the inherent unfairness to the shareholder caused when an insider trades with him on the basis of undisclosed inside information.
Without doubt, breaches of the insider's duty occur most often when an insider seeks personal aggrandizement at the expense of shareholders. Because of this, descriptions of the duty to disclose are often coupled with statements that the duty prevents unjust enrichment. See, e.g., In re Cady, Roberts & Co., 40 S.E.C. at 912, n. 15; Langevoort, 70 Calif.L.Rev. at 19. Private gain is certainly a strong motivation for breaching the duty.
It is, however, not an element of the breach of this duty. The reference to personal gain in Cady, Roberts for example, is appended to the first element underlying the duty which requires that an insider have a special relationship to corporate information that he cannot appropriate for his own benefit. See n. 8, supra. It does not limit the second element, which addresses the injury to the shareholder and is at issue here. See ibid. In fact, Cady, Roberts describes the duty more precisely in a later footnote:
Of course, an insider is not liable in a Rule 10b-5 administrative action unless he has the requisite scienter. Aaron v. SEC, 446 U.S. at 446 U. S. 691. He must know that his conduct violates or intend that it violate his duty. Secrist obviously knew and intended that Dirks would cause trading on the inside information, and that Equity Funding shareholders would be harmed. The scienter requirement addresses the intent necessary to support liability; it does not address the motives behind the intent.
The Court seems concerned that this case bears on insiders' contacts with analysts for valid corporate reasons. Ante at 463 U. S. 658-659. It also fears that insiders may not be able to determine whether the information transmitted is material or nonpublic. Ante at 463 U. S. 661-662. When the disclosure is to an investment banker or some other adviser, however, there is normally no breach, because the insider does not have scienter: he does not intend that the inside information be used for trading purposes to the disadvantage of shareholders. Moreover, if the insider in good faith does not believe that the information is material or nonpublic, he also lacks the necessary scienter. Ernst & Ernst v. Hochfelder, 425 U.S. at 425 U. S. 197. In fact, the scienter requirement functions in part to protect good faith errors of this type. Id. at 425 U. S. 211, n. 31.
The situation here, of course, is radically different. Ante at 463 U. S. 658, n. 18 (Dirks received information requiring no analysis "as to its market relevance"). Secrist divulged the information for the precise purpose of causing Dirks' clients to trade on it. I fail to understand how imposing liability on Dirks will affect legitimate insider analyst contacts.
The duty involved in Mosser was the duty to the corporation in trust not to misappropriate its assets. This duty, of course, differs from the duty to shareholders involved in this case. See n. 7, supra. Trustees are also subject to a higher standard of care than scienter. 3 A. Scott, Law of Trusts § 201, p. 1650 (3d ed.1967). In addition, strict trustees are bound not to trade in securities at all. See Langevoort, 70 Calif.L.Rev. at 2, n. 5. These differences, however, are irrelevant to the principle of Mosser that the motive of personal gain is not essential to a trustee's liability. In Mosser, as here, personal gain accrued to the tippees. See 341 U.S. at 341 U. S. 273.
The Court acknowledges the burdens and difficulties of this approach, but asserts that a principle is needed to guide market participants. Ante at 463 U. S. 664. I fail to see how the Court's rule has any practical advantage over the SEC's presumption. The Court's approach is particularly difficult to administer when the insider is not directly enriched monetarily by the trading he induces. For example, the Court does not explain why the benefit Secrist obtained -- the good feeling of exposing a fraud and his enhanced reputation -- is any different from the benefit to an insider who gives the information as a gift to a friend or relative. Under the Court's somewhat cynical view, gifts involve personal gain. See ibid. Secrist surely gave Dirks a gift of the commissions Dirks made on the deal in order to induce him to disseminate the information. The distinction between pure altruism and self-interest has puzzled philosophers for centuries; there is no reason to believe that courts and administrative law judges will have an easier time with it.
This position seems little different from the theory that insider trading should be permitted because it brings relevant information to the market. See H. Manne, Insider Trading and the Stock Market 59-76, 111-146 (1966); Manne, Insider Trading and the Law Professors, 23 Vand.L.Rev. 547, 565-576 (1970). The Court also seems to embrace a variant of that extreme theory, which postulates that insider trading causes no harm at all to those who purchase from the insider. Ante at 463 U. S. 666-667, n. 27. Both the theory and its variant sit at the opposite end of the theoretical spectrum from the much maligned equality-of-information theory, and never have been adopted by Congress or ratified by this Court. See Langevoort, 70 Calif.L.Rev. at 1, and n. 1. The theory rejects the existence of any enforceable principle of fairness between market participants.
The Court uncritically accepts Dirks' own view of his role in uncovering the Equity Funding fraud. See ante at 463 U. S. 658, n. 18. It ignores the fact that Secrist gave the same information at the same time to state insurance regulators, who proceeded to expose massive fraud in a major Equity Funding subsidiary. The fraud surfaced before Dirks ever spoke to the SEC.
Secrist did pass on his information to regulatory authorities. His good but misguided motive may be the reason the SEC did not join him in the administrative proceedings against Dirks and his clients. The fact that the SEC, in an exercise of prosecutorial discretion, did not charge Secrist under Rule 10b-5 says nothing about the applicable law. Cf. ante at 463 U. S. 665, n. 25 (suggesting otherwise). Nor does the fact that the SEC took an unsupportable legal position in proceedings below indicate that neither Secrist nor Dirks is liable under any theory. Cf. ibid. (same).
At oral argument, the SEC's view was that Dirks' obligation to disclose would not be satisfied by reporting the information to the SEC. Tr. of Oral Arg. 27, quoted ante at 463 U. S. 661, n. 21. This position is in apparent conflict with the statement in its brief that speaks favorably of a safe harbor rule under which an investor satisfies his obligation to disclose by reporting the information to the Commission and then waiting a set period before trading. Brief for Respondent 43-44. The SEC, however, has neither proposed nor adopted a rule to this effect, and thus persons such as Dirks have no real option other than to refrain from trading.