Dirks versus Securities and Exchange Commission Case Study

. 2. 3. 4. 5. 6. 7. 8. Your write-up should be 1 to 2 pages, single-spaced, at standard typeface (12 or 14 point). It should briefly (in very few sentences) lay out the basic facts of the case. These are usually generally agreed upon by the time it gets to the final appeal stage; i.e., the Supreme Court or a Federal District court. What is much more important is the issue at law – the dispute about what the law means or how it should be interpreted. What was the majority of the court’s decision in the case, and – more importantly – what was the basic reasoning behind this decision? If you are asked to read a dissent in the case, what was the decision and reasoning in the minority? Do you agree or disagree with the court’s decision? Explain why. To avoid even the appearance of plagiarism, references should be clearly connected to the text through parentheses (Smith, 2016) or footnotes. It is not enough to put your references at the end of the paper, with no way to see what text connects with each reference. Direct quotes should be in quotation marks or, if more than one sentence, in an indented paragraph. Material which is a close paraphrase of another work, although not a direct quote, should be referenced and explicitly acknowledged with the expressions like ‘paraphrase,’ ‘in other words,’ ‘to put it another way,’ or something similar. Page 1 DIRKS v. SECURITIES AND EXCHANGE COMMISSION No. 82-276 SUPREME COURT OF THE UNITED STATES 463 U.S. 646; 103 S. Ct. 3255; 77 L. Ed. 2d 911; 1983 U.S. LEXIS 102; 51 U.S.L.W. 5123; Fed. Sec. L. Rep. (CCH) P99,255 March 21, 1983 Argued July 1, 1983, Decided JUDGES: POWELL, J., delivered the opinion of the Court, in which BURGER, C. J., and WHITE, REHNQUIST, STEVENS, and O’CONNOR, JJ., joined. BLACKMUN, J., filed a dissenting opinion, in which BRENNAN and MARSHALL, JJ., joined, post, p. 667. OPINION BY: POWELL OPINION JUSTICE POWELL delivered the opinion of the Court. Petitioner Raymond Dirks received material nonpublic information from “insiders” of a corporation with which he had no connection. He disclosed this information to investors who relied on it in trading in the shares of the corporation. The question is whether Dirks violated the antifraud provisions of the federal securities laws by this disclosure. I In 1973, Dirks was an officer of a New York broker-dealer firm who specialized in providing investment analysis of insurance company securities to institutional investors. 1 On March 6, Dirks received information from Ronald Secrist, a former officer of Equity Funding of America. Secrist alleged that the assets of Equity Funding, a diversified corporation primarily engaged in selling life insurance and mutual funds, were vastly overstated as the result of fraudulent corporate practices. Secrist also stated that various regulatory agencies had failed to act on similar charges made by Equity Funding employees. He urged Dirks to verify the fraud and disclose it publicly. 1 The facts stated here are taken from more detailed statements set forth by the Administrative Law Judge, App. 176-180, 225-247; the opinion of the Securities and Exchange Commission, 21 S. E. C. Docket 1401, 1402-1406 (1981); and the opinion of Judge Wright in the Court of Appeals, 220 U. S. App. D. C. 309, 314-318, 681 F.2d 824, 829-833 (1982). Dirks decided to investigate the allegations. He visited Equity Funding’s headquarters in Los Angeles and interviewed several officers and employees of the corporation. The senior management denied any wrongdoing, but certain corporation employees corroborated the charges of fraud. Neither Dirks nor his firm owned or traded any Equity Funding stock, but throughout his investigation he openly discussed the information he had obtained with a number of clients and investors. Some of these persons sold their holdings of Equity Funding securities, including five investment advisers who liquidated holdings of more than $ 16 million. 2 2 Dirks received from his firm a salary plus a commission for securities transactions above a certain amount that his clients directed through his firm. See 21 S. E. C. Docket, at 1402, n. 3. But “[it] is not clear how many of those with whom Dirks spoke promised to direct some brokerage business through [Dirks’ firm] to compensate Dirks, or how many actually did so.” 220 U. S. App. D. C., at 316, 681 F.2d, at 831. The Boston Company Institutional Investors, Inc., promised Dirks about $ 25,000 in commissions, but it is unclear whether Boston actually generated any brokerage business for his firm. See App. 199, 204-205; 21 S. E. C. Docket, at 1404, n. 10; 220 U. S. App. D. C., at 316, n. 5, 681 F.2d, at 831, n. 5. 1 Page 2 463 U.S. 646, *; 103 S. Ct. 3255, **; 77 L. Ed. 2d 911, ***; 1983 U.S. LEXIS 102 While Dirks was in Los Angeles, he was in touch regularly with William Blundell, the Wall Street Journal’s Los Angeles bureau chief. Dirks urged Blundell to write a story on the fraud allegations. Blundell did not believe, however, that such a massive fraud could go undetected and declined to write the story. He feared that publishing such damaging hearsay might be libelous. During the 2-week period in which Dirks pursued his investigation and spread word of Secrist’s charges, the price of Equity Funding stock fell from $ 26 per share to less than $ 15 per share. This led the New York Stock Exchange to halt trading on March 27. Shortly thereafter California insurance authorities impounded Equity Funding’s records and uncovered evidence of the fraud. Only then did the Securities and Exchange Commission (SEC) file a complaint against Equity Funding 3 and only then, on April 2, did the Wall Street Journal publish a front-page story based largely on information assembled by Dirks. Equity Funding immediately went into receivership. 4 3 As early as 1971, the SEC had received allegations of fraudulent accounting practices at Equity Funding. Moreover, on March 9, 1973, an official of the California Insurance Department informed the SEC’s regional office in Los Angeles of Secrist’s charges of fraud. Dirks himself voluntarily presented his information at the SEC’s regional office beginning on March 27. 4 A federal grand jury in Los Angeles subsequently returned a 105-count indictment against 22 persons, including many of Equity Funding’s officers and directors. All defendants were found guilty of one or more counts, either by a plea of guilty or a conviction after trial. See Brief for Petitioner 15; App. 149-153. The SEC began an investigation into Dirks’ role in the exposure of the fraud. After a hearing by an Administrative Law Judge, the SEC found that Dirks had aided and abetted violations of ß 17(a) of the Securities Act of 1933, 48 Stat. 84, as amended, 15 U. S. C. ß 77q(a), 5 ß 10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, 15 U. S. C. ß 78j(b), 6 and SEC Rule 10b-5, 17 CFR ß 240.10b-5 (1983), 7 by repeating the allegations of fraud to members of the investment community who later sold their Equity Funding stock. The SEC concluded: “Where ‘tippees’ — regardless of their motivation or occupation — come into possession of material ‘corporate information that they know is confidential and know or should know came from a corporate insider,’ they must either publicly disclose that information or refrain from trading.” 21 S. E. C. Docket 1401, 1407 (1981) (footnote omitted) (quoting Chiarella v. United States, 445 U.S. 222, 230, n. 12 (1980)). Recognizing, however, that Dirks “played an important role in bringing [Equity Funding’s] massive fraud to light,” 21 S. E. C. Docket, at 1412, 8 the SEC only censured him. 9 5 Section 17(a), as set forth in 15 U. S. C. ß 77q(a), provides: “It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly -“(1) to employ any device, scheme, or artifice to defraud, or “(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or “(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.” 6 Section 10(b) provides: “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange -“(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.” 7 Rule 10b-5 provides: “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, “(a) To employ any device, scheme, or artifice to defraud, “(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or 2 Page 3 463 U.S. 646, *; 103 S. Ct. 3255, **; 77 L. Ed. 2d 911, ***; 1983 U.S. LEXIS 102 “(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.” 8 JUSTICE BLACKMUN’s dissenting opinion minimizes the role Dirks played in making public the Equity Funding fraud. See post, at 670 and 677, n. 15. The dissent would rewrite the history of Dirks’ extensive investigative efforts. See, e. g., 21 S. E. C. Docket, at 1412 (“It is clear that Dirks played an important role in bringing [Equity Funding’s] massive fraud to light, and it is also true that he reported the fraud allegation to [Equity Funding’s] auditors and sought to have the information published in the Wall Street Journal”); 220 U. S. App. D. C., at 314, 681 F.2d, at 829 (Wright, J.) (“Largely thanks to Dirks one of the most infamous frauds in recent memory was uncovered and exposed, while the record shows that the SEC repeatedly missed opportunities to investigate Equity Funding”). 9 Section 15 of the Securities Exchange Act, 15 U. S. C. ß 78o(b)(4)(E), provides that the SEC may impose certain sanctions, including censure, on any person associated with a registered broker-dealer who has “willfully aided [or] abetted” any violation of the federal securities laws. See 15 U. S. C. ß 78ff(a) (1976 ed., Supp. V) (providing criminal penalties). Dirks sought review in the Court of Appeals for the District of Columbia Circuit. The court entered judgment against Dirks “for the reasons stated by the Commission in its opinion.” App. to Pet. for Cert. C-2. Judge Wright, a member of the panel, subsequently issued an opinion. Judge Robb concurred in the result and Judge Tamm dissented; neither filed a separate opinion. Judge Wright believed that “the obligations of corporate fiduciaries pass to all those to whom they disclose their information before it has been disseminated to the public at large.” 220 U. S. App. D. C. 309, 324, 681 F.2d 824, 839 (1982). Alternatively, Judge Wright concluded that, as an employee of a broker-dealer, Dirks had violated “obligations to the SEC and to the public completely independent of any obligations he acquired” as a result of receiving the information. Id., at 325, 681 F.2d, at 840. In view of the importance to the SEC and to the securities industry of the question presented by this case, we granted a writ of certiorari. 459 U.S. 1014 (1982). We now reverse. II In the seminal case of In re Cady, Roberts & Co., 40 S. E. C. 907 (1961), the SEC recognized that the common law in some jurisdictions imposes on “corporate ‘insiders,’ particularly officers, directors, or controlling stockholders” an “affirmative duty of disclosure . . . when dealing in securities.” Id., at 911, and n. 13. 10 The SEC found that not only did breach of this common-law duty also establish the elements of a Rule 10b-5 violation, 11 but that individuals other than corporate insiders could be obligated either to disclose material nonpublic information 12 before trading or to abstain from trading altogether. Id., at 912. In Chiarella, we accepted the two elements set out in Cady, Roberts for establishing a Rule 10b-5 violation: “(i) the existence of a relationship affording access to inside information intended to be available only for a corporate purpose, and (ii) the unfairness of allowing a corporate insider to take advantage of that information by trading without disclosure.” 445 U.S., at 227. In examining whether Chiarella had an obligation to disclose or abstain, the Court found that there is no general duty to disclose before trading on material nonpublic information, 13 and held that “a duty to disclose under ß 10(b) does not arise from the mere possession of nonpublic market information.” Id., at 235. Such a duty arises rather from the existence of a fiduciary relationship. See id., at 227-235. 10 The duty that insiders owe to the corporation’s shareholders not to trade on inside information differs from the common-law duty that officers and directors also have to the corporation itself not to mismanage corporate assets, of which confidential information is one. See 3 W. Fletcher, Cyclopedia of the Law of Private Corporations ßß 848, 900 (rev. ed. 1975 and Supp. 1982); 3A id., ßß 1168.1, 1168.2 (rev. ed. 1975). In holding that breaches of this duty to shareholders violated the Securities Exchange Act, the Cady, Roberts Commission recognized, and we agree, that “[a] significant purpose of the Exchange Act was to eliminate the idea that use of inside information for personal advantage was a normal emolument of corporate office.” See 40 S. E. C., at 912, n. 15. 11 Rule 10b-5 is generally the most inclusive of the three provisions on which the SEC rested its decision in this case, and we will refer to it when we note the statutory basis for the SEC’s inside-trading rules. 12 The SEC views the disclosure duty as requiring more than disclosure to purchasers or sellers: “Proper and adequate disclosure of significant corporate developments can only be effected by a public release through the appropriate public media, designed to achieve a broad dissemination to the investing public generally and without favoring any special person or group.” In re Faberge, Inc., 45 S. E. C. 249, 256 (1973). 13 See 445 U.S., at 233; id., at 237 (STEVENS, J., concurring); id., at 238-239 (BRENNAN, J., concurring in judgment); id., at 239-240 (BURGER, C. J., dissenting). Cf. id., at 252, n. 2 (BLACKMUN, J., dissenting) (recognizing that there is no obligation to disclose material nonpublic information obtained through the exercise of “diligence or acumen” and “honest means,” as opposed to “stealth”). 3 Page 4 463 U.S. 646, *; 103 S. Ct. 3255, **; 77 L. Ed. 2d 911, ***; 1983 U.S. LEXIS 102 Not “all breaches of fiduciary duty in connection with a securities transaction,” however, come within the ambit of Rule 10b-5. Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 472 (1977). There must also be “manipulation or deception.” Id., at 473. In an inside-trading case this fraud derives from the “inherent unfairness involved where one takes advantage” of “information intended to be available only for a corporate purpose and not for the personal benefit of anyone.” In re Merrill Lynch, Pierce, Fenner & Smith, Inc., 43 S. E. C. 933, 936 (1968). Thus, an insider will be liable under Rule 10b-5 for inside trading only where he fails to disclose material nonpublic information before trading on it and thus makes “secret profits.” Cady, Roberts, supra, at 916, n. 31. III We were explicit in Chiarella in saying that there can be no duty to disclose where the person who has traded on inside information “was not [the corporation’s] agent, . . . was not a fiduciary, [or] was not a person in whom the sellers [of the securities] had placed their trust and confidence.” 445 U.S., at 232. Not to require such a fiduciary relationship, we recognized, would “[depart] radically from the established doctrine that duty arises from a specific relationship between two parties” and would amount to “recognizing a general duty between all participants in market transactions to forgo actions based on material, nonpublic information.” Id., at 232, 233. This requirement of a specific relationship between the shareholders and the individual trading on inside information has created analytical difficulties for the SEC and courts in policing tippees who trade on inside information. Unlike insiders who have independent fiduciary duties to both the corporation and its shareholders, the typical tippee has no such relationships. 14 In view of this absence, it has been unclear how a tippee acquires the Cady, Roberts duty to refrain from trading on inside information. 14 Under certain circumstances, such as where corporate information is revealed legitimately to an underwriter, accountant, lawyer, or consultant working for the corporation, these outsiders may become fiduciaries of the shareholders. The basis for recognizing this fiduciary duty is not simply that such persons acquired nonpublic corporate information, but rather that they have entered into a special confidential relationship in the conduct of the business of the enterprise and are given access to information solely for corporate purposes. See SEC v. Monarch Fund, 608 F.2d 938, 942 (CA2 1979); In re Investors Management Co., 44 S. E. C. 633, 645 (1971); In re Van Alstyne, Noel & Co., 43 S. E. C. 1080, 1084-1085 (1969); In re Merrill Lynch, Pierce, Fenner & Smith, Inc., 43 S. E. C. 933, 937 (1968); Cady, Roberts, 40 S. E. C., at 912. When such a person breaches his fiduciary relationship, he may be treated more properly as a tipper than a tippee. See Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 495 F.2d 228, 237 (CA2 1974) (investment banker had access to material information when working on a proposed public offering for the corporation). For such a duty to be imposed, however, the corporation must expect the outsider to keep the disclosed nonpublic information confidential, and the relationship at least must imply such a duty. A The SEC’s position, as stated in its opinion in this case, is that a tippee “inherits” the Cady, Roberts obligation to shareholders whenever he receives inside information from an insider: “In tipping potential traders, Dirks breached a duty which he had assumed as a result of knowingly receiving confidential information from [Equity Funding] insiders. Tippees such as Dirks who receive non-public, material information from insiders become ‘subject to the same duty as [the] insiders.’ Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc. [495 F.2d 228, 237 (CA2 1974) (quoting Ross v. Licht, 263 F.Supp. 395, 410 (SDNY 1967))]. Such a tippee breaches the fiduciary duty which he assumes from the insider when the tippee knowingly transmits the information to someone who will probably trade on the basis thereof. . . . Presumably, Dirks’ informants were entitled to disclose the [Equity Funding] fraud in order to bring it to light and its perpetrators to justice. However, Dirks — standing in their shoes -committed a breach of the fiduciary duty which he had assumed in dealing with them, when he passed the information on to traders.” 21 S. E. C. Docket, at 1410, n. 42. This view differs little from the view that we rejected as inconsistent with congressional in …
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