Tippee Assumes a Fiduciary Duty Not to Trade on Material Information Only When Insider Has Breached His Fiduciary Duty to Shareholders
Agnew, Randy L.
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Discusses the case, Dirks v. SEC, where Dirks was charged with aided and abetted violations of section 17(a) of the Securities Act of 1933, section 10(b) of the Securities Exchange Act of 1934, and rule l0b-5 by selectively disseminating "inside" information to investors whom he knew were likely to sell their holdings to uninformed public investors. The SEC reasoned that when tippees come into possession of material nonpublic information that "they know is confidential and know or should know came from a corporate insider," they are under a duty to either disclose or refrain from trading or recommending the securities. On review, the Court of Appeals for the District of Columbia Circuit upheld the SEC's decision to censure Dirks for reasons given by the SEC's opinion. The United States Supreme Court granted certiorari in the case and reversed the SEC's decision. The Court held that a "tippee" assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic information or, in the alternative, not to disclose such information to those likely to trade on this information, only when the insider has breached his fiduciary duty to the shareholders by disclosing such information and the tippee knows or should know there has been a breach. Dirks solidifies the traditional notion that an affirmative duty to disclose an informational advantage must be predicated upon an extraordinary relationship between the parties, that of a fiduciary or confidential nature.