DIRKS v S. E. C.

463 U.S. 646 (1983)

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.

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. 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.

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.

While Dirks was in Los Angeles, he was in touch regularly with William Blundell, the Wall Street 7ournal'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 two-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 and only then, on April 2, did the Wall Street,7ournal publish a

front-page story based largely on information assembled by Dirks. Equity Funding immediately went into receivership.

The SEC began an investigation into Dirks' role in the exposure of the fraud. The SEC concluded: "Where

'tippees'-regardless of their motivation or occupation-come into possession of material '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, the SEC

only censured him.

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."

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."

The SEC found that not only did breach of this common-law duty also establish the elements of a Rule 10b-5 violation, but that individuals other than corporate insiders could be obligated either to disclose material nonpublic information before trading or to abstain from trading altogether.

[A] tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic

information only when the insider has breached his fiduciary duty to the shareholders by disclosing the

information to the tippee and the tippee knows or should know that there has been a breach.

Whether disclosure is a breach of duty therefore depends in large part on the purpose of the disclosure. This

standard was identified by the SEC itself in Cady, Roberts: a purpose of the securities laws was to eliminate "use of inside information for personal advantage." Thus, the test is whether the insider personally will benefit, directly or indirectly, from his disclosure. Absent some personal gain, there has been no breach of duty to stockholders. And absent a breach by the insider, there is no derivative breach.

Under the inside-trading and tipping rules set forth above, we find that there was no actionable violation by

Dirks. It is undisputed that Dirks himself was a stranger to Equity Funding, with no preexisting fiduciary duty to its shareholders. He took no action, directly, or indirectly, that induced the shareholders or officers of Equity Funding to repose trust or confidence in him. There was no expectation by Dirk's sources that he would keep their information in confidence. Nor did Dirks misappropriate

or illegally obtain the information about Equity

Funding. Unless the insiders breached their Cady, Roberts duty to shareholders in disclosing the nonpublic

information to Dirks, he breached no duty when he passed it on to investors as well as to the Wall Street Journal.

It is clear that neither Secrist nor the other Equity Funding employees violated their Cady, Roberts duty

to the corporation's shareholders by providing information to Dirks. The tippers received no monetary or personal benefit for revealing Equity Funding's secrets, nor was their purpose to make a gift of valuable information to Dirks. As the facts of this case clearly indicate, the tippers were motivated by a desire to expose the fraud. In the absence of a breach of duty to shareholders by the insiders, there was no derivative breach by Dirks. Dirks therefore could not have been "a participant after the fact in [an] insider's breach of a fiduciary duty." Chiarella, 445 U.S., at 230, n. 12.

We conclude that Dirks, in the circumstances of this case, had no duty to ,abstain from the use of the inside

information that he obtained. The judgment of the Court of Appeals therefore is reversed.