Legal Document

472 U.S. 299 105 S.Ct. 2622 86 L.Ed.2d 215 BATEMAN EICHLER, HILL RICHARDS, INCORPORATED, Petitioner,v.Carl F. BERNER et al. No. 84-679. Argued April 15, 1985. Decided June 11, Syllabus Respondent investors (hereafter respondents) filed a damages action in Federal District Court, alleging that they incurred substantial trading losses after securities broker (employed by petitioner) and the officer of corporation fraudulently induced respondents to purchase stock divulging false materially incomplete information about on pretext it was accurate inside information. Respondents contended this alleged scheme violated, inter alia, § 10(b) Securities Exchange Act 1934 Commission Rule 10b-5 promulgated thereunder. The Court dismissed complaint ground that, because themselves had violated same laws under which recovery sought what believed information, were pari delicto with corporate insider thus barred from recovery. Appeals reversed. Held: There is no basis at stage litigation for applying defense bar respondents' action. Pp. 306-319. (a) An implied private federal may be grounds plaintiff's own culpability only where (i) as direct result his actions, plaintiff bears least substantially equal responsibility violations he seeks redress, (ii) preclusion suit would not significantly interfere effective enforcement protection investing public. Cf. Perma Life Mufflers, Inc. v. International Parts Corp., 392 134, 88 1981, 20 982. 306-311. (b) Because tippee's duty disclose material nonpublic typically derivative insider-tipper's duty, tippee these circumstances cannot said culpable tipper whose breach gave rise liability first place. Moreover, insiders broker-dealers who selectively non-public issuer commit potentially broader range than do tippees trade Absent other actions can fairly outweigh broker-dealers, properly characterized being tippers. 311-314. (c) Denying such will best promote public national economy. First, allowing defrauded bring against defrauding promotes important goal exposing wrongdoers rendering them more easily subject civil, administrative, criminal penalties. Second, deterrence most frequently maximized bringing pressures bear sources broker-dealers. Third, many responsive deterrent potential sanctions. Finally, there are means deter trading. Although might well situations relative culpabilities their merit different mix incentives, cases instant one interest advanced if permitted expose illegal practices full view appropriate 315-319. 730 F.2d 1319, affirmed. Robert S. Warren, Los Angeles, Cal., petitioner. Geoffrey P. Knudsen, San Francisco, respondents. Bruce N. Kuhlik, Washington, D.C., S.E.C. amicus curiae support respondents, special leave Court. Justice BRENNAN delivered opinion 1 question presented case whether common-law bars induce misrepresenting conveying issuer. 2 * respondent United States Northern California, conspiracy between Charles Lazzaro, registered employed petitioner Bateman Eichler, Hill Richards, (Bateman Eichler), Leslie Neadeau, President T.O.N.M. Oil & Gas Exploration Corporation (TONM), large quantities TONM over-the-counter company information.1 Specifically, Lazzaro have told personally knew learned, "[v]ast amounts gold been discovered Surinam, options thousands acres goldproducing regions Surinam";2 discovery "not publically known, but subsequently announced"; currently engaged negotiations companies form joint venture mining Surinamese gold; (d) when made public, "TONM stock, then selling $1.50 $3.00/share, increase value $10 $15/share within short period time, . $100/share" year. Complaint &Par; 16-17, App. 10-12.3 Some aver contacted Neadeau inquired Lazzaro's tips accurate; stated knowledge" "would neither confirm nor deny those claims," allegedly advised "Lazzaro very trustworthy good man." Id. ¶ 19, 12. 3 admitted purchased much through "on premise privy certain otherwise available general public." 10. Their shares initially increased dramatically price, ultimately declined below price fell through. 22-26, 13-14.4 4 representations set forth above knowing "were untrue and/or contained half-truths, omissions fact falsehoods,"5 intending rely thereon, purpose "influenc[ing] manipulat[ing] stock" so "to profit taking commissions secret profits." 23, 30, 38, 13, 15-16.6 1934, 48 Stat. 891, 15 U.S.C. 78j(b),7 (SEC) thereunder, 17 CFR 240.10b-5 (1984).8 They capital lost profits, punitive damages, costs attorney's fees. 26.9 5 failure state claim. court reasoned "trading itself violation rule 10b-5" allegations demonstrated "violated particular statutory provision sought." Pet. Cert. C-2. Thus, concluded, absolutely Ibid. 6 Ninth Circuit Berner 1319 (1984). assumed laws, id., 1324, nevertheless concluded "securities professionals officers fraud should invoke doctrine shield consequences fraudulent misrepresentation," 1320. noted sharply restricted availability antitrust see 982 (1968), essentially three reasons, "for creating initiated laws," F.2d, 1322. this, "equally responsible" allege. "totally incompatible overall aims law" threat necessary "insider-tipster[s]" Id., 1323. an outright n. 3. 7 lower courts divided over proper scope litigation.10 We granted certiorari. 469 1105, 776, 83 772 (1985). affirm. II 8 issue derives Latin, potior est conditio defendentis: "In or mutual fault position [defending] party better one."11 grounded two premises: first, lend offices mediating disputes among wrongdoers;12 second, denying judicial relief wrongdoer deterring illegality.13 In its classic formulation, narrowly limited truly bore injury, "in both parties delicto, concurring act, does always follow stand delicto; be, often are, degrees guilt." J. Story, Equity Jurisprudence 304-305 (13th ed. 1886) (Story). Thus "inequality condition" parties, 305, "a confidential relationship th[em]" determined "relative standing" before court, Pomeroy, 942a, p. 741 (5th 1941) (Pomeroy). addition, policy considerations undergirded construed precluding even injury: "[T]here part necessity supporting interests cases, however reprehensible acts be." Story 305. Notwithstanding traditional limitations, given broad application plaintiffs simply involved generally "the sort wrongdoing" defendants. U.S., 138, S.Ct., 1984.14 9 Life, we emphasized inappropriateness invoking barriers serves purposes." 1984. That treble-damages Midas Muffler franchisor several dealers, franchise agreement created restrain Sherman Clayton Acts.15 agreement, franchisor. reversing determination, indication Congress intended incorporate into "are served insuring ever-present anyone contemplating [illegal] business behavior." 139, Accordingly, complex scope, contents, effects, recognized action." 140, reserved "truly complete involvement participation monopolistic scheme" "aggressively support[ed] further[ed] parcel it"—could pursuing action, finding muffler dealers relatively little bargaining power coerced agreeing contract's provisions. 10 separate opinions, five Justices agreed concept "equal fault" defined arising regulatory statutes.16 "[B]ecause strong eliminating restraints competition, refinements moral worth demanded variations applicable field." 151, 1991 (MARSHALL, J., result). however, violation, based fault—whether denominated litigation.17 11 Eichler argues —with emphasis importance analyzing effects fault-based defenses congressional goals—is marginal relevance laws. observes expressly provided actions—thereby manifesting "desire go beyond common law statute order provide encouragement help anticompetitive conduct"—whereas rights merely provision18—thereby, apparently, defense. Brief Petitioner 32. buttresses argument observing unlike Acts, contain savings provisions directing "[t]he remedies [those laws] shall addition any all exist equity"19—again, false-based Life. disagree. Nothing suggested implications govern provides remedies; formulation required careful consideration See supra, 307. repeatedly weapon enforcement" supplement J.I. Case Co. Borak, 377 426, 432, 84 1555, 1560, 12 423 (1964); also Blue Chip Stamps Manor Drug Stores, 421 723, 730, 95 1917, 1922, 44 539 (1975). eschewed rigid construing See, e.g., Herman MacLean Huddleston, 459 375, 388-389, 103 683, 690-691, 74 548 (1983) (common-law doctrines sometimes "questionable pertinence" rectify perceived deficiencies protections establishing higher standards conduct industry"); A.C. Frost Coeur d'Alene Mines 312 43, 61 414, 417, 85 L.Ed. 500 (1941) (rejecting unclean hands facts "seriously hinder rather aid real purpose" laws).20 therefore conclude views expressed apply force causes (1) (2) proceeded assumption 10b-5, accept purposes resolving us. 40-41, 415-416.21 contends delictum par reasons. whereas participate "passively" economic coercion, ordinary voluntarily choosing literally "any person" violates terms, recognize gradations culpability. 13 agree voluntary nature investor's decision impermissibly tip renders investor blameworthy someone contract solely virtue another's overweening power. disagree, engages necessarily broker-dealer discloses personal gain. reach distinctions tippers, professionals, circumstances. has clear recent Terms use violate unless owes corresponding Dirks SEC, 463 646, 654-664, 3255, 3261-3266, 77 911 (1983); Chiarella States, 445 222, 230, 12, 100 1108, 1116, 63 348 (1980). "derivative insider's duty." 659, 3263; 664, 3266. words, obligation viewed role participant fiduciary duty" toward shareholders. 12.22 context trading, believe person place.23 14 A guilty individual shareholders, responsibility. But insider, disclosing breaches duties itself.24 And intentionally conveys tippee, commits additional violation: tippee. Such particularly egregious committed professional, honesty fair dealing clients. Pomeroy 741. certainly concluding Neadeau. masterminded manipulate market benefit, used purchasing unwitting dupes inflate stock. event place "stamp approval" conduct. 238, 1120 (STEVENS, concurring). accepting true—as must reviewing Court's dismissal pleadings—Lazzaro "awakened [the respondents] desire wrongful gain remained dormant, inspired [their] mind[s] unfounded idea [they were] going secure it, pretenses deprived [them] money," Stewart Wright, 147 Fed. 321, 328-329 (CA8), cert. denied, 203 590, 27 777, 51 330 (1906)—actions occurred, far reasonable conduct.25 B 16 primary objective laws—protection economy promotion high standard ethics every facet industry." SEC Capital Gains Research Bureau, Inc., 375 180, 186-187, 275, 280, 237 (1963). number caveat serve goal,26 contrary adopted represents view.27 To begin with, barring inexorably undetected authorities unremedied. us "does resources police industry sufficiently ensure tipping occur consistently discovered," "[w]ithout tippees' assistance, could effectively prosecute tipping—a difficult practice detect." Amicus Curiae 25. H.R.Rep. 98-355, ("In years, markets grown size complexity, while declined"). permit "litigation [that serve] unlawful render penalties." Kuehnert Texstar 412 700, 706, (CA5 1969) (Godbold, dissenting). defense, incentive tipper, undermine goal.28 18 information—corporate 19 "The true fountainhead If prophylactic restrict until carrying out nip bud source discouraging him 'making initial disclosure step chain dissemination.' This readily achieved making unavailable sued upon charges misinformation." Nathanson Weis, Voisin, Cannon, 325 F.Supp. 50, 57-58 (SDNY 1971). pressure sanctions; likely counsel thereby informed fully "allowable limits conduct." 706 dissenting).29 arise tipper-tippee factors discussed preclude recognition defense.30 21 Lower reaching conclusion asserted absent vigorous allowance have, effect, enforceable warranty true," 705, information.31 These reasoned, enviable 'heads-I-win tails-you-lose,' " Wolfson Baker, 623 1074, 1082 1980), 450 966, 101 1483, 67 615 (1981)—if correct, reap illicit fails yield expected return, sue recover damages. 22 "enforceable warranty" theory overstated overlooks significant irrespective allowed. attempt cash warranties" civil penalties conduct.32 defendants acted scienter. Ernst Hochfelder, 425 185, 96 1375, 47 668 (1976). "if 'pan out' proves move anticipated direction, stands lose investment. Only situation deliberately able maintain recoup money." 3.33 23 As case, warrant giving license defraud fear prosecution." 24 Affirmed. 25 Chief BURGER concurs judgment. 26 MARSHALL took case. named TONM, 5-8, 7-8. charged "directly indirectly participated aided abetted, conspired with" scheme. 9, 8; id. 40, 17. Eichler's premised status "controlling meaning 20(a) 899, 78t(a). 5, 39, 7, 16-17. 25, infra. 19.6, "respondents" refer exclusively plaintiffs, defending judgment Gold exploration conducted Surinam production since early century. 9. areas historically mined natives using primitive methods," accessible outside world "primarily motorized canoes helicopter." TONM's "compared favorably to, than, South Africa," development require deep mining" "[g]eologists nuggets dry creek beds." 16, 11. announcement, shareholders automatically receive" subsidiary, Diamond "without payment monies." (emphasis original). late 1979 1980 $3 per share, rose $7 share fourth quarter 1980. 22, 13. "[S]ome all" claim time wanted sell shares, let know just reached $7.00/share still." plummeted approximately $1.00 share" end 1980, "less next 24-25, 14. alternative, "recklessly wanton disregard truth." 32, 15. owned 100,000 outstanding "controlled million himself clients." 8, ("Lazzaro relatives block stock"). did influence purchases sales thereof, dissemination others." section provides: "It person, directly indirectly, instrumentality interstate commerce mails, facility exchange— "(b) employ, connection sale security exchange registered, manipulative deceptive device contrivance contravention rules regulations prescribe investors." commerce, mails exchange, "(a) employ device, scheme, artifice defraud, make statement omit statements made, light misleading, "(c) engage practice, course operates operate deceit security." pursuant 17(a) 1933, 84, amended, 77q(a), 48-50, 20, treated comparable express right exists 17(a). Compare Keys Wolfe, 709 413, 416 1983), Stephenson Calpine Conifers II, Ltd., 652 808, 815 (CA9 1981). various claims pendent state-law Tarasi Pittsburgh National Bank, 555 1152 (CA3) (allowing defense), 434 965, 98 504, 54 451 (1977); Malamphy Real-Tex Enterprises, 527 978 (CA4 1975) (per curiam ) (sustaining submission jury); Woolf S.D. Cohn Co., 515 591, 601-605 case), rehearing, 521 225, vacated remanded grounds, 426 944, 3161, 49 1181 (1976); 700 defense); Kirkland E.F. Hutton 564 427, 433-437 (ED Mich.1983) motion summary judgment); Grumet Shearson/American Express, 336 (NJ 1983) Xaphes Shearson, Hayden, Stone, 508 882, 884-887 (SD Fla.1981) dismiss); Moholt Dean Witter Reynolds, 478 (DC 1979) re Haven Industries, 462 172, 177-180 1978) 50 1971) Wohl Blair F.R.D. 89 1970) (denying strike defense). Silverberg Paine, Webber, Jackson Curtis, 710 678, 691 (CA11 1983); Mallis Bankers Trust 68, 76 (CA2 449 1123, 938, 109 (1981); Can-Am Petroleum Beck, 331 371, 373 (CA10 1964). Black's Law Dictionary 711 1979). Higgins McCrea, 116 671, 685, 557, 564, 29 764 (1886); Austin's Adm'x Winston's Ex'x, Va. 33, (1806) ("He comes here draw justice pure fountains"). Holman Johnson, Cowp. 341, 343, Eng.Rep. 1120, 1121 (K.B.1775): objection, immoral defendant, sounds times ill mouth defendant. It sake, objection ever principle this; ex dolo malo non oritur actio [out arises]. goes; sake plaintiff." McMullen Hoffman, 174 639, 669-670, 839, 850-851, 43 1117 (1899): "To refuse grant either tends strongly towards reducing transactions minimum. plainly understand enter contracts law, consists aiding enforce contracts, less inclined them. way secures benefit adherence law." 1157; L. Loss, Fundamentals Regulation 1197 Comment, Availability Pari Delicto Defense Tippee Suits, Colum.L.Rev. 1084, 1086, (1977). Act, 209 seq., seq.; 38 seq. 145, 1987 (WHITE, concurring); 147-148, 1988-1989 (Fortas, result); 148-149, 1989, 1990 154-155, 1992 (Harlan, joined Stewart, dissenting part). WHITE historic useful concept" defendant injury resulting them." 143, 146, 1988. four allowed explicit, though limited, itself. 147, 1988 1989 153, (1975); Superintendent Insurance Cas. 404 6, 92 165, 169, 30 128 (1971). 77p; 28(a) 903, 78bb(a). Frost, quoted approvingly memorandum arguing '[i]t appears entirely immaterial labelled "void" held delicto." There, labels, reached, solution problem. ultimate effectuate frustrate Act.' 44, 2, 2. note, complaint. abstain knows "has breached information"—in "benefit, disclosure." 660, 662, 3264, 3265, (1983). derive "pecuniary gain," "reputational translate future earnings," confer gift friend." 663-664, 3265-3266. 655, 14, 3261, (alternative "entered enterprise [is] access purposes"). aware stood earn, uncertain Neadeau—the flows—had revealing joint-venture Lazzaro. favor shareholders' interests, sufficient courts' notwithstanding character traded on. suggests conveyed explorations true, exaggeration include 10-12, 18, 8-9, 12-13, acquired Dirks, false, contend attempted duties. drawn courts. 1159-1160; 704; F.Supp., 340. hand, inherited governed legal impossibility, liability, factual theory. Note, Tippee-Tipper Actions After 62 Wash.U.L.Q. 519, 540-542 briefed considered below, proceed activities rendered delicto. liable "misappropriate[s] illegally obtain[s] information." 665, 3267. pp. 14-15 (1983), U.S.Code Cong. Admin.News 1984, 2274. Our reinforced Congress' enactment Insider Trading Sanctions 1264-1265, 78u(d)(2) (1982 ed., Supp. III), imposes nontrading tippers belief "[a]bsent tipper's misconduct, occur" "most violation," 2282. 3261; Colum.L.Rev., supra 1094, 64. reversal Circuit's employee Industry Association (SIA), brokerage firm employee, 1, "vicarious" "secondary." SIA 20-24. addressed Circuit, raised Circuit. respect firms persons" this. 1163-1164; 705; 340; F.R.D., 93. dissenting); 435-436; 54-57. 28 analysis buttressed reference 9(e) 890, 78i(e), allows co-conspirators contribution who, original suit, payment." overrides co-conspirators, "parties left found." Texas Radcliff Materials, 630, 635, 2061, 2064, 68 (1981). observes, "[s]urely, professional fellow manipulators understood victims him." 26. "tippees constitute larger class measures aimed tippees, proportionately successful, still undeterred. [even if] equally measures, appear preferable recovery." 1096-1097 (footnote omitted). "even equal, simultaneous mutual, reject [in delicto] appeared defendant's impact ability control defendant." 604; 76, 6. seek need address 31 179-180. 32 §§ 78u(d)(2), 78ff(a) severe sanctions persons fines up $100,000. 33 limiting out-of-pocket losses. issue, measure relief.

Classification Label: 7