Opinion ID: 425977
Heading Depth: 3
Heading Rank: 2

Heading: Chiarella v. United States

Text: 11 In Chiarella v. United States, 445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980), an employee of a New York financial printer deduced the identity of corporate takeover targets from the confidential offering documents prepared by his firm. Without disclosing his knowledge of the acquiring company's plans, Chiarella purchased stock in the target companies and sold it at a substantial profit immediately after public announcement of the takeovers. Id. at 224, 100 S.Ct. at 1112. He was indicted and convicted of violating section 10(b) of the 1934 Act and rule 10b-5. A divided Court of Appeals affirmed the conviction. United States v. Chiarella, 588 F.2d 1358 (2d Cir.1978) (Meskill, J., dissenting). The Supreme Court reversed, stating that: 12 In this case, the petitioner was convicted of violating Sec. 10(b) although he was not a corporate insider and he received no confidential information from the target company. Moreover, the market information upon which he relied did not concern the earning power or operations of the target company, but only the plans of the acquiring company. Petitioner's use of that information was not a fraud under Sec. 10(b) unless he was subject to an affirmative duty to disclose it before trading. 13 Chiarella v. United States, 445 U.S. at 231, 100 S.Ct. at 1116 (emphasis added) (footnote omitted); see Dirks v. SEC, --- U.S. at ----, 103 S.Ct. at 3261. The Court explained that liability for nondisclosure of material nonpublic market information under section 10(b) is premised upon a duty to disclose arising from a relationship of trust and confidence between parties to a transaction. Id. at 230, 100 S.Ct. at 1115. Absent an insider or fiduciary relationship with the sellers of stock, a purchaser has no duty to disclose nonpublic market information. Id. at 229, 100 S.Ct. at 1115 (citing with approval General Time Corp. v. Talley Industries, Inc., 403 F.2d 159, 164 (2d Cir.1968), cert. denied, 393 U.S. 1026, 89 S.Ct. 631, 21 L.Ed.2d 570 (1969) (We know of no rule of law ... that a purchaser of stock, who was not an 'insider' and had no fiduciary relation to a prospective seller, had any obligation to reveal circumstances that might raise a seller's demands and thus abort the sale.)); see also Polinsky v. MCA Inc., 680 F.2d 1286, 1290 (9th Cir.1982) ([A] purchaser of stock who has no fiduciary relationship to the prospective seller of the stock and who owns less than five percent of the target companies' stock has no duty to disclose circumstances that will insure the purchaser pays the highest possible price for the stock.); Staffin v. Greenberg, 672 F.2d 1196, 1201-02 (3d Cir.1982). 14 The Court concluded unequivocally that Chiarella owed no duty of disclosure: 15 [T]he element required to make silence fraudulent--a duty to disclose--is absent in this case. No duty could arise from petitioner's relationship with the sellers of the target company's securities, for petitioner had no prior dealings with them. He was not their agent, he was not a fiduciary, he was not a person in whom the sellers had placed their trust and confidence. He was, in fact, a complete stranger who dealt with the sellers only through impersonal market transactions. 16 Chiarella v. United States, 445 U.S. at 232-33, 100 S.Ct. at 1116-17.