Opinion ID: 425977
Heading Depth: 3
Heading Rank: 4

Heading: Misappropriation Theory of Disclosure

Text: 33 In addition to arguing that he satisfied the Chiarella duty to disclose standard, Moss alternatively argues that the district court misread Chiarella. He contends that Chiarella establishes only that a duty to disclose under Sec. 10(b) does not arise from the mere possession of nonpublic market information. 445 U.S. at 235, 100 S.Ct. at 1118. Moss urges us to recognize an exception to Chiarella and allow a section 10(b) cause of action against any person who trades on the basis of nonpublic misappropriated information. 34 Both Moss and the SEC premise their misappropriation theory on Justice Burger's dissent in Chiarella: 35 I would read Sec. 10(b) and Rule 10b-5 to encompass and build on this principle: to mean that a person who has misappropriated nonpublic information has an absolute duty to disclose that information or to refrain from trading. 36 Id. at 240, 100 S.Ct. at 1121; see id. at 239, 100 S.Ct. at 1120 (Brennan, J., concurring) (a person violates Sec. 10(b) whenever he improperly obtains or converts to his own benefit nonpublic information which he then uses in connection with the purchase or sale of securities). In essence, Moss' theory is that any person who misappropriates information owes a general duty of disclosure to the entire marketplace. He asserts that this Court's recognition of the misappropriation theory is necessary to effectuate the remedial purposes of the securities laws. See generally Herman & MacLean v. Huddleston, --- U.S. ----, ----, 103 S.Ct. 683, 686-87, 74 L.Ed.2d 548 (1983). 37 While we agree that the general purpose of the securities laws is to protect investors, the creation of a new species of fraud under section 10(b) would depart[ ] radically from the established doctrine that duty arises from a specific relationship between two parties ... [and] should not be undertaken absent some explicit evidence of congressional intent. Chiarella v. United States, 445 U.S. at 233, 100 S.Ct. at 1117. In speaking of the origins of the concept of fraud as embodied in the federal securities laws, the Supreme Court in Chiarella stated that: 38 At common law, misrepresentation made for the purpose of inducing reliance upon the false statement is fraudulent. But one who fails to disclose material information prior to the consummation of a transaction commits fraud only when he is under a duty to do so. 39 Id. at 227-28, 100 S.Ct. at 1114 (emphasis added). 40 In effect, plaintiff's misappropriation theory would grant him a windfall recovery simply to discourage tortious conduct by securities purchasers. Yet, the Supreme Court has made clear that section 10(b) and rule 10b-5 protect investors against fraud; they do not remedy every instance of undesirable conduct involving securities. Id. at 232, 100 S.Ct. at 1116; Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 474-77, 97 S.Ct. 1292, 1301-03, 51 L.Ed.2d 480 (1977). As defendants owed no duty of disclosure to plaintiff Moss, they committed no fraud in purchasing shares of Deseret stock. 41 Moreover, the Court has refused to recognize a general duty between all participants in market transactions to forgo actions based on material, nonpublic information. Chiarella v. United States, 445 U.S. at 233, 100 S.Ct. at 1117. Rather, in Chiarella the Court stated that: 42 [N]either the Congress nor the Commission ever has adopted a parity-of-information rule.... 43 .... 44 ... We hold that a duty to disclose under Sec. 10(b) does not arise from the mere possession of nonpublic market information. The contrary result is without support in the legislative history of Sec. 10(b) and would be inconsistent with the careful plan that Congress has enacted for regulation of the securities markets. Cf. Santa Fe Industries, Inc. v. Green, 430 U.S. at 479, 97 S.Ct. at 1304. 45 Id. at 233, 235, 100 S.Ct. at 1117, 1118 (emphasis added) (footnotes omitted). We find that plaintiff's misappropriation theory clearly contradicts the Supreme Court's holding in both Chiarella and Dirks and therefore conclude that the complaint fails to state a valid section 10(b) or rule 10b-5 cause of action.