Federal Securities Law: Insider Trading
Congressional Research Service 6
Thus, it appears that this case established that Section 10(b) and Rule 10b-5 extend beyond
officers, directors, and major stockholders to others who receive information from a corporate
source.
Securities and Exchange Commission v. Texas Gulf Sulphur,
a 1968 decision by the U.S. Court
of Appeals for the Second Circuit (Second Circuit), supported the SEC’s ruling in Cady Roberts
by suggesting that anyone in possession of inside information must either publicly disclose the
information or not trade the particular stock until the information becomes public.
The U.S. Supreme Court appears, however, in 1980 to have somewhat modified Texas Gulf
Sulphur by indicating that, for there to be a fraud actionable under Rule 10b-5, there must be a
duty to disclose arising from a relationship of trust and confidence between parties to the
transaction. Chiarella v. United States
alleged a violation of Rule 10b-5 by an employee of a
financial printer. The employee, who was involved in printing materials related to corporate
takeover bids, deduced the names of the target companies from information contained in
documents delivered to the printer by the acquiring companies. Without disclosing his
knowledge, the employee purchased stock in the target companies and sold the shares
immediately after the information was made public, realizing a profit of $30,000. The lower
courts found a violation of Rule 10b-5 and convicted the employee of the print company for
willfully failing to inform the sellers of the target company securities that he knew of an
imminent takeover bid that would increase the value of their stock.
The Supreme Court reversed. According to the Court, the employee in this situation did not have
a duty to disclose the information. He was not a corporate insider and he received no confidential
information. In addition, no duty arose from the relationship between the printing company
employee and the sellers of the target companies’ securities. The Court held that a duty to disclose
under Section 10(b) and Rule 10b-5 does not arise from the mere possession of nonpublic market
information.
Dirks v. Securities and Exchange Commission
went perhaps a little further than Chiarella in the
direction of indicating that noncorporate persons with inside information are not always liable
when trading on inside information. This case involved an officer of a broker-dealer who
specialized in providing investment analysis of insurance company securities to institutional
investors. He received information that the assets of an insurance company were greatly
401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969).
445 U.S. 222 (1980).
Concurring and dissenting opinions in Chiarella suggest that, if the misappropriation theory of securities fraud had
been presented, Chiarella, a financial printer employee who deduced information from the printing materials related to
takeover bids and then traded based on the information, might have been found guilty under it. Chief Justice Burger
believed that the employee’s conviction should have been affirmed because the “evidence shows beyond all doubt that
Chiarella, working literally in the shadows of the warning signs [stating employer’s confidentiality policy] in the
printshop misappropriated—stole, to put it bluntly—nonpublic information entrusted to him in the utmost confidence.”
Chiarella, 445 U.S. at 245 (Burger, C.J., dissenting). Although Justice Brennan disagreed with the Chief Justice’s view
of the evidence, he agreed that a “person violates section 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.” Id. at 239
(Brennan, J., concurring). Justice Blackmun, with whom Justice Marshall joined, wrote that, even without resting
Chiarella’s conviction on a misappropriation theory, he should have been convicted because he had “purloined”
information (Blackmun, J., dissenting, id. at 246-252). Justice Stevens, who concurred in the opinion of the Court,
wrote separately, emphasizing the “fact that we have not necessarily placed any stamp of approval on what this
petitioner did, nor have we held that similar actions must be considered lawful in the future.” (Stevens, J., concurring,
id. at 238).
463 U.S. 646 (1983).