Document: 463 U.S. 646 103 S.Ct. 3255 77 L.Ed.2d 911 Raymond L. DIRKS, Petitionerv.SECURITIES AND EXCHANGE COMMISSION. No. 82-276. Argued March 21, 1983. Decided July 1, Syllabus While serving as an officer of a broker-dealer, petitioner, who specialized in providing investment analysis insurance company securities to institutional investors, received information from former that its assets were vastly overstated the result fraudulent corporate practices and various regulatory agencies had failed act on similar charges made by employees. Upon petitioner's investigation allegations, certain employees corroborated fraud charges, but senior management denied any wrongdoing. Neither petitioner nor his firm owned or traded company's stock, throughout he openly discussed nformation obtained with number clients some whom sold their holdings company. The Wall Street Journal declined publish story urged petitioner. After price stock fell during investigation, New York Stock Exchange halted trading stock. State authorities then impounded records uncovered evidence fraud. Only did Securities Commission (SEC) file complaint against company, only based largely assembled hearing concerning role exposure fraud, SEC found aided abetted violations antifraud provisions federal laws, including § 10(b) Act 1934 Rule 10b-5, repeating allegations members community later Because bringing light, however, censured him. On review, Court Appeals entered judgment Held: 1. Two elements for establishing violation 10b-5 insiders are existence relationship affording access inside intended be available purpose, unfairness allowing insider take advantage without disclosure. A duty disclose abstain does not arise mere possession nonpublic market information. Such arises rather fiduciary relationship. Chiarella v. United States, 445 222, 100 1108, 63 348. There must also "manipulation deception" bring breach connection transaction within ambit 10b-5. Thus, is liable under where fails material before it thus makes secret profits. Pp. 653-654. 2. Unlike have independent duties both corporation shareholders, typical tippee has no such relationships. insider's inherits abstain. 654-664. (a) SEC's position knowingly receives invariably rests erroneous theory require equal among all traders. between parties merely one's ability acquire because market. 655-659. (b) tippee, always free trade His derivative duty. Tippees assume shareholders they receive information, been them improperly. assumes when breached disclosing knows should know there breach. 659-661. (c) In determining whether obligation abstain, necessary determine "tip" constituted Whether disclosure depends large part personal benefit Absent improper stockholders. And absent insider, 661-664. 3. Under inside-trading tipping rules set forth above, use obtained, was actionable He pre-existing shareholders. Moreover, employees, insiders, violate absence 665-667. 220 U.S.App.D.C. 309, 681 F.2d 824 (1982), reversed. David Bonderman, Washington, D.C., Paul Gonson, respondent. Justice POWELL delivered opinion Court. 1 Petitioner Dirks "insiders" which connection. disclosed this investors relied shares corporation. question violated laws 2 * 1973, broker-dealer investors.1 6, Ronald Secrist, Equity Funding America. Secrist alleged Funding, diversified primarily engaged selling life mutual funds, practices. stated verify publicly. 3 decided investigate allegations. visited Funding's headquarters Los Angeles interviewed several officers wrongdoing, investors. Some these persons securities, five advisers liquidated more than $16 million.2 4 Angeles, touch regularly William Blundell, Journal's bureau chief. Blundell write believe, massive could go undetected story. feared publishin damaging hearsay might libelous. 5 During two-week period pursued spread word Secrist's $26 per share less $15 share. This led halt 27. Shortly thereafter California Funding3 then, April 2, front-page Dirks. immediately went into receivership.4 6 began Dirks' administrative law judge, 17(a) 1933, 15 U.S.C. 77q(a),5 1934, 78j(b),6 17 CFR 240.10b-5 (1982),7 concluded: "Where 'tippees'—regardless motivation occupation—come 'information confidential came insider,' either publicly refrain trading." 21 S.E.C. Docket 1401, 1407 (1981) (footnote omitted) (quoting 230 n. 12, 1115 348 (1980)). Recognizing, "played important [Equity Funding's] light," Docket, at 1412,8 him.9 7 sought review District Columbia Circuit. court "for reasons opinion." App. Pet. Cert. C-2. Judge Wright, member panel, subsequently issued opinion. Robb concurred Tamm dissented; neither filed separate Wright believed "the obligations fiduciaries pass those disseminated public large." 324, 824, 839 (1982). Alternatively, concluded that, employee "obligations completely acquired" receiving Id., 325, F.2d, 840. 8 view importance industry presented case, we granted writ certiorari. --- ----, 371, 74 506 We now reverse. II 9 seminal case re Cady, Roberts & Co., 40 907 (1961), recognized common jurisdictions imposes "corporate 'insiders,' particularly officers, directors, controlling stockholders" "affirmative . dealing securities." 911, 13.10 common-law establish violation,11 individuals other obligated information12 altogether. 912. Chiarella, accepted two out Cady violation: "(i) (ii) disclosure." U.S., 227, S.Ct., 1114. examining Chiar lla general information,13 held "a information." 235, 1118. See id., 227-235, 1114-18. 10 Not "all breaches transaction," come Santa Fe Industries, Inc. Green, 430 462, 472, 97 1292, 1300, 51 480 (1977). deception." 473, 1300. derives "inherent involved one takes advantage" "information purpose anyone." Merrill Lynch, Pierce, Fenner Smith, Inc., 43 933, 936 (1968). will "secret profits." Roberts, S.E.C., 916, 31. III 11 explicit saying can person "was [the corporation's] agent, fiduciary, [or] sellers [of securities] placed trust confidence." 232, 1116. relationship, recognized, would "depar[t] radically established doctrine specific parties" amount "recognizing participants transactions forgo actions material, 233, 1116, 1117. requirement relati nship individual created analytical difficulties courts policing tippees relationships.14 absence, unclear how acquires 12 position, "inherits" whenever insider: 13 "In potential traders, assumed Funding] insiders. non-public become 'subject same [the] insiders.' Shapiro [495 228, 237 (CA2 1974) Ross Licht, 263 F.Supp. 395, 410 (SDNY 1967)) ]. transmits someone probably basis thereof. Presumably, informants entitled order light perpetrators justice. However, Dirks—standing shoes—committed them, passed traders." 1410, 42. 14 differs little rejected inconsistent congressional intent Chiarella. agreed affirmed Chiarella's conviction, holding " '[a ] nyone —corporate not—who may incurring affirmative disclose.' States 588 1358, 1365 1978) (emphasis original). Here, maintains anyone trading.15 effect, liability cases appears rooted idea conflicts principle persons, circumstances, barred while information.16 correctly read our repudiating notion traders enjoy trading: "[T]he 'information' rejected. disclose-or-refrain extraordinary, attaches party legal comply proscriptions laws." U.S.App.D.C., 322, 837. 20, 1118, 20. reaffirm today "[a] [to disclose] market." 232-233, 14, 1116-17, 14. 16 Imposing solely trades inhibiting influence analysts, itself recognizes preservation healthy market.17 It commonplace analysts "ferret analyze information," 1406,18 often done meeting questioning others obtain normally judgments worth corporation's securities. analyst's respect letters otherwise th firm. nature type indeed markets themselves, cannot simultaneously stockholders generally. B conclusion recipients do mean need ban clear. forbidden personally using undisclosed advantage, give outsider exploiting gain. 78t(b) (making unlawful indirectly "by means person" laws). Similarly, participate "as forbidden" "on behalf trustee himself." Mosser Darrow, 341 267, 272, 71 680, 682, 95 L.Ed. 927 (1951). Jackson 254 586, 589, 41 200, 201, 65 418 (1921); Ludeling, 88 (21 Wall) 616, 631-632, 22 492 (1874). As explained Mosser, contrary rule "would open up opportunities devious dealings name conduct own." 271, 682. Texas Gulf Sulphur 446 1301, 1308 (CA2), cert. denied, 404 1005, 92 561, 30 558 (1971). tippee's Tr. Oral Ar. 38. Cf. 246, 1123, (BLACKMUN, J., dissenting). noted "[t]he viewed arising par icipant after fact duty." 230, 1115, 12. 18 improperly.19 purposes, breach.20 Commissioner Smith perceptively observed Investors Management Co.: "[T]ippee responsibility related back finding knew given him having special issuer ." 44 651 (concurring result). Tipping properly violating disclose-or-abstain rule.21 C 19 All disclosures owe contrast extraordinary facts situation violates analysts. 16, supra. situations, consistently yet release affect For example, clear—either recipient analyst—whether Corporate officials mistakenly think already enough therefore standard identified Roberts: eliminate "use advantage." 912, 15. 10, test benefit, directly indirectly, gain, breach.22 "It focus what se possession. 648 20 argues if exist transmitted proper used trading, rare fabricate ostensibly legitimate business justification transmitting unduly concerned. making particular fraudulent, required parties' minds. Scienter relevant tipper duty.23 But "deceive[s], manipulate[s], defraud[s]" Aaron SEC, 686, 1945, 1950, 64 611 (1980), initial inquiry insider. requires objective criteria, i.e., direct indirect disclosure, pecuniary gain reputational translate future earnings. 15; Brudney, Insiders, Outsiders, Informational Advantages Federal Laws, 93 Harv.L.Rev. (1979) ("The giving selectively, effect cash, reciprocal things value himself. ."). circumstances justify inference. suggests quid pro quo latter, intention recipient. exploitation gift relative friend. tip resemble himself followed profits Determining benefits fact, easy courts. essential, think, guiding whose daily activities limited instructed rules, believe contrast, adopted limiting principle.24 IV find Dirks.25 undisputed stranger shareholders.26 took action, induced repose confidence expectation Dirk's sources keep confidence. Nor misappropriate illegally about Funding. Unless Dirks, well Journal. clear Dirks.27 tippers monetary revealing secrets, make valuable clearly indicate, motivated desire expose supra, 648-649. participant [an] V 23 conclude obtained. 24 Reversed. 25 BLACKMUN, BRENNAN MARSHALL join, dissenting. 26 still another step limit protections provided 1934.1 (1980) (dissenting opinion). device employed engrafts motivational doctrine. innovation excuses knowing intentional motive Even justified. 27 recognizes, ante, 658, 17, here unusual. employee, 7, 226, company.2 Court's words, "[h]e startling exercise relevance." Ante, 17. disseminate clients, unload market, fall precipitously, thereby triggering reaction authorities. 25, 28 complied informant's wishes. Instead reporting (SEC Commission) agencies, undertook own investigation.3 One first steps associates Delafield Childs draw list eight days flew story, reported full Boston Company Institutional Investors, approximately $1.2 million securities.4 199. gathered selectively clients. To gave "hard" story—all allegations; "soft" story—a recitation vague factors reflect adversely management. 211, 24. 29 attempts nonclients feeble, best. left message Herbert Lawson, San Francisco chief until call Lawson again, outline situation. investigative reporter got telephone call. met Angeles. relying contacts, telephoned Stanley Sporkin, Deputy Director Enforcement. 26, next day, Sporkin staff asked see following morning. Trading time talking personnel. 28, suspended By time, unloaded close plummeted $15. selective dissemination able shift losses inevitable due themselves uninformed participants. A. No questions disadvantage purchasers Brief Amicus Curiae 19, printer stood states, 653, w en extends 8, 1114, citing Gratz Claughton, 187 46, 49 920, 741, 1353 31 acknowledges proxy prohibited doing personally. 659; precisely did. turn dumped unknowing purchasers. injure disclose. Accepting liability,5 knowledge fact. 659, 667; 32 holds, duty; according Court, so 662-663, 666-667. doing, new, subjective limitation scope owed novelty reflected lack support it.6 33 shareholders.7 Langevoort, Insider Fiduciary Principle: Post-Chiarella Restatement, 70 Calif.L.Rev. (1982); 3A W. Fletcher, Private Corporations 1168.2, pp. 288-289 (1975). shareholder. That assures shareholder harm unfairly.8 protects injury. Pepper Litton, 308 295, 307, 15, 60 238, 245, 84 281 (1939); Strong Rapide, 213 419, 431-434, 521, 525-26, 53 853 (1909); 10; cf. Pepper, 245 (fiduciary exists protection). 34 eradicate shareholder's injury.9 Restatement (Second) Trusts 205, Comments c d (1959) (trustee acts causing diminution trust); Scott p. 1665 (1967) caused breach). difference gained transaction; lost misuse addressed motives,10 consequences Personal element duty.11 35 borne decision There, faced analogous situation: reorganization employee-promoters subsidiaries companies being reorganized provide services considered essential successful operation trust. secure services, expressly continue subsidiaries. turned substantial expense holders companies' 36 acknowledged actual arrangement; motives selfless devoted companies. 275, 684. nevertheless, estate authorized.12 described trustee's defalcation willful deliberate setting interest adverse trust." depend irrelevant; like abuse Dodge Ford Motor 204 Mich. 459, 506-509, 170 N.W. 668, 684-685 (1919) (Henry Ford's philanthropic permit dividend policies shareholders). 37 demonstrates, consists taking action disadvantageous owes shares. addition bad claim flatly Mosser. I join shareholders.13 38 law, implicitly policy accept. justifies derived outweighed Heller, 14e-3 : "Fairness" versus Economic Theory, Bus. Lawyer 517, 550 Easterbrook, Trading, Secret Agents, Evidentiary Privileges, Production Information, 1981 S.Ct.Rev. 338—in end justified means. view, conferred society paid clients.14 39 Although laudable, chose not. even assuming played exposing fraud,15 profit Secrist. Misprison felony long policy. Branzburg Hayes, 408 665, 696-697, 2646, 2664, 626 (1972); 4. condition transmission crime financial award. citizen, least ethical report 661, deficient terms create norm norm, ibid., actually rewards aiding abetting. it.16 agree difficult. recognize seemingly helpful satisfy tells unless disclose; refuses, tell disclose.17 Faberge, 45 249, 256 (1973) (disclosure through media designed reach investing generally). seems sensible policy, incumbent correct. authority remedy problem opening hole congressionally mandated prohibition rewarding trading. my cause therefo e, lead trade, Any disservice country's attempt fair efficient capital markets. dissent. taken detailed statements 176-180, 225-247; Commission, 1402-1406 (1981); Appeals, 314-318, 829-833 salary plus commission above directed 1402, "[i]t many spoke promised brokerage [Dirks' firm] compensate so." 316, 831. $25,000 commissions, generated 199, 204-205; 1404, 5, 831, 5. early 1971, accounting 9, official Insurance Department informed regional office voluntarily beginning grand jury returned 105-count indictment directors. defendants guilty counts, plea conviction trial. 149-153. Section provides: shall offer sale instruments transportation communication interstate commerce mails, indirectly— "(1) employ device, scheme, artifice defraud, "(2) money property untrue statement omission state made, misleading, "(3) engage transaction, practice, course operates operate deceit upon purchaser." person, instrumentality facility national exchange— "(b) employ, purchase security registered exchange registered, manipulative deceptive contrivance contravention regulations prescribe appropriate protection investors." dir ctly commerce, mails exchange, "(a) omit "(c) act, security." BLACKMUN's dissenting minimizes post, 670 677, dissent rewrite history extensive efforts. See, e.g., 1412 ("It true allegation auditors published Journal."); 829 (Wright, J.) ("Largely thanks most infamous frauds recent memory exposed, record shows repeatedly missed Funding."). Act, 78o (b)(4)(E), provides impose sanctions, censure, associated "willfully abetted" laws. 78ff(a) (providing criminal penalties). directors mismanage assets, one. Fletcher Cyclopedia Laws §§ 848, 900 (1975 ed. Supp.1982); 1168.1, 1168.2. agree, significant normal emolument office." generally inclusive three rested refer note statutory rules. views requiring sellers: "Proper adequate developments effected media, achieve broad favoring group." (1973). 1117; 237, 1119 (STEVENS, concurring); 238-239, 1119-20 (BRENNAN, concurring judgment); 239-240, 1120 (BURGER, C.J., 252, 1126, dissenting) (recognizing "diligence acumen" "honest means," opposed "stealth"). revealed legitimately underwriter, accountant, lawyer, consultant working corporation, outsiders recognizing simply acquired enterprise purposes. Monarch Fund, 608 938, 942 1979); 633, 645 (1971); Van Alystne, Noel 1080, 1084-1085 (1969); 937 (1968); When treated tippee. 495 (investment banker proposed offering corporation). imposed, expect confidential, imply Apparently, believes receipt carried it, involvement inherited explain, why automatically carries emphasized rise abstain; that. creates Apparently weakness argument distinguish factually involving "inside" "market" relating earnings." Respondent 23. drew distinction and, THE CHIEF JUSTICE noted, distinction." 241, 1121, ALI Fed.Sec.Code 1603, Comment (2)(j) (Proposed Official Draft 1978). formulation absolute "should undertaken intent." Rather adopting radical Congress exempted professionals 11(a)(1) 78k(a)(1), account. 1117, 16. exception Congress' recognition [market professionals] contribute orderly marketplace exploit informational comes [nonpublic information]." Ibid. entire [analysts'] efforts gainsaid; efficiency pricing significantly enhanced [their] initiatives ferret work redounds 1406. asserts remain purposes "filling 'interstices analysis'. 42 646). inherently imprecise, imprecision prevents ordering accord requirements. guidance line permissible impermissible uses, sure crossed. Adler Klawans, 267 840, 845 1959) (Burger, sitting designation). facts, unusual analyst firm, interview investigation. uncovered, relevance. Nonetheless, issue beyond facts. applicable regard insider—could serious ramifications views. Despite unusualness "find," central uncovering play corporations reason withhold public, careful brought grossly inaccurate. efforts, gone longer. imposed knows, know, improperly "that information] revelation otherwise." 641 added). it. 650 Professor Loss linked concept restitution ' [w]here beneficiary communicates third notice duty, holds constructive information.' Loss, Regulation 1451 (2d 1961) Restitution 201(2) (1937)). Other likewise expressed knowledge. 1967); Jacobs, Impact 167, 7-4 (1975) ("[T]he better obtained."); Fleischer, Mundheim Murphy, An Initial Inquiry Into Responsibility Disclose Market 121 U.Pa.L.Rev. 798, 818, 76 extension restrictions best participating duty."). Agency 312, comment (1958) ("A who, agent principal, [deemed] trustee."). suggest ever "socially desirable devoid moral considerations." Dooley, Enforcement Restrictions, 66 Va.L.Rev. 55 (1980). promptly indications illegal typically Depending perm tted behavior below standards conduct. area regulation, principles application applied, "significant distinctions ideals." Report Special Study Markets, H.R.Doc. 95, 88th Cong., 1st Sess., pt. 237-238 (1963). this. At oral argument, place: "QUESTION: So, satisfied first? "[SEC's counsel]: observe known rule. Either abstain." Arg. example turning court's determination Walton Morgan 623 796 1980). defendant banking representing investigated possible target takeover bid client. negotiations given, basis, unpublished Subsequently, abandoned, charged decision, arm's-length negotiations. 798. imposing 799. —"a mental embracing deceive, manipulate, defraud," Ernst Hochfelder, 425 185, 193, 96 1375, 1381, 47 668 (1976) violation. 695, 1955, Contrary dissent's suggestion, 674, irrelevant scienter. results investors; rather, "intentional deceive defraud artificially affecting 1383. acted scienter, all, injury 27, infra. Without limitations, forced rely reasonableness litigation strategy, hazardous, plain. Following filing Gu f (and Chairman) Budge implications applying cases: "Turning realm present civil actions, certainly contemplate suing every across vast rank named defendants. outside learns Speech Hamer Regional Group American Society Secretaries, (Nov. 18, 1965) added), reprinted Budge, Case—What Is What Isn't, Corp. Secretary 127, (Dec. 1965). contends "tippee" unverified "material facts" truly crime. Solicitor General agrees. 22. decide, facts," characterized "inside deciding correctness findings, virtue broker-dealer. 325-327, 840-842. consider Wright's novel Appeals. argued merits Chenery Corp., 332 194, 196-197, 67 1575, 1577, 91 1995 (1947). contend "Thus, regardless ultimate attention derelictions shareholders." perceived "duty" markedly tippee-trading date. charge understand 250 (decision judge) ("One non-public, fully trading."); Reply Notice Supplemental Authority ("If acting properly, Funding]'s private information."); 47-50; ("[K]nowing disclose."); 52-54; ("[T]his manner acquired. ."); 322-323, 838 J.). "Secrist Post, 678-679. perceiving intentionally effectively below, explicitly "based parties." 654-655, constitute 1383, (statutory words "manipulative," "device," "contrivance connot[e] securities") "deceive defraud" anyone. convey unlawfully concealing, and—so far shows—he persuading way proved fruitless. standard, focuses "losses," "injury," "damages," causal outsiders' losses. sense, values fluctuate inevitably incomplete incorrect winners losers; "lost" necessarily defrauded. hand, - 41, 70. significance new "victims" traded. prevented continuing victimizing Blue Chip Stamps Manor Drug Stores, 421 723, 1917, 539 (1975); (1976); Piper Chris-Craft 926, 124 (1977); (1980); trend frustrates interpreted flexibly protect Affiliated Ute Citizens 406 128, 151, 1456, 1471, 741 Capital Gains Research Bureau, 375 180, 186, 279, (1963), regulate "detrimental interests investor," S.Rep. 792, 73d 2d (1934); H.R.Rep. (1934). continues refuse decisions deference gives agency's interpretation statute. Blum Bacon, 457 132, 102 2355, 72 728 Unknown told regulators day. They assured subsidiary sufficient cover outstanding Illinois regulators. investigators, joined officials, conducted surprise audit subsidiary, 87-88, $22 subsidiary's missing. 30, seized control subsidiary. 271. proceeding here, Administrative Law (ALJ) clients—five advisors—violated 77q(a), 78j(b), 240.10b-5, tips. 297. censured, except Dreyfus Corporation. ALJ Goldman, Sachs, purchaser 299, 301. None appealed determinations. B-2, implicit suggestion advice, 649, commissions. 204-205. exact economic unknowable structure compensation doubt reputations "looking after" interpret otherwise. cites footnote Brudney 663-664. footnote, identifies prevent. define itself. Brudney's quoted context assertion prior mechanism correct noninsiders. breaching gain; state, aggrandizement. 345-348 (1979). Surely, adopt access-to-information theory, cousin equality-of-information accuses harboring. 655-658. distinguishes corpor tion affairs assets. 9. recover damages causes distinct Diamond Oreamuno, N.Y.2d 494, 498, 301 N.Y.S.2d 78, 80, 248 N.E.2d 910, 912 Thomas Roblin 520 1393, 1397 (CA3 1975), 111 226-229, 1113-15, adopts 653 654. "Analytically, principal elements; first, access, anyone, second, inherent unavailable dealing." 907, (1961) omitted). element—on establishes present. second—not —identifies against: doubt, occur seeks aggrandizement this, descriptions coupled unjust enrichment. (1961); Calif.L.Rev., 19. strong is, reference appended underlying benefit. second addresses here. ibid. describes footnote: insider's] customers expense, misrepresent place ahead enrichment Of cou se, requisite 691, 1952, intend obviously harmed. scienter liability; address behind intent. concerned bears insiders' contacts valid reasons. 658-659. fears nonpublic. 661-662. adviser, scienter: good faith nonpublic, lacks 197, 1382, (1976). functions errors type. 31, 1389, Should adviser contractual arrangement, 796, 798-799 course, different. (Dirks relevance"). divulged precise fail insider-analyst contacts. corp ration case. Trustees subject higher care 1650 (1967). addition, strict trustees bound all. These differences, liability. accrued tippees. 273, 683. disagree motive, adds judicial burden cases. Assuming validity requirement, approach—a occurs 31—can seen presumption gains tipping. case-by-case determination, prohibiting presumption. burdens approach, needed guide 664. practical over approach difficult administer enriched monetarily induces. explain obtained—the feeling reputation—is different friend relative. somewhat cynical gifts involve surely commissions deal induce pure altruism self-interest puzzled philosophers centuries; judges easier permitted brings H. Manne, 59-76, 111-146 (1966); Professors, Vand.L.Rev. 547, 565-576 (1970). embrace variant extreme postulates 666-667, Both sit opposite e theoretical spectrum much maligned never ratified rejects enforceable fairness uncritically accepts ignores regulators, proceeded major surfaced SEC. misguided proceedings prosecutorial discretion, says nothing law. (suggesting otherwise). unsupportable indicate theory. (same). apparent conflict brief speaks favorably safe harbor investor satisfies waiting 43-44. real option

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