Brief Fact Summary. Individuals who received false inside information brought suit against the parties that provided them with that information.
Synopsis of Rule of Law. "[A] private action for damages in [an insider trader context] may be barred on the grounds of the plaintiff's own culpability only where (1) as a direct result of his own actions, the plaintiff bears at least substantially equal responsibility for the violations he seeks to redress, and (2) preclusion of suit would not significantly interfere with the effective enforcement of the securities laws and protection of the investing public."
Issue. "The question presented by this case is whether the common-law in pari delicto defense bars a private damages action under the federal securities laws against corporate insiders and broker-dealers who fraudulently induce investors to purchase securities by misrepresenting that they are conveying material nonpublic information about the issuer."
Held. No. The in pari delicto defense means "[i]n a case of equal or mutual fault … the position of the [defending] party … is the better one." There are two main purposes for the defense. First, courts should not "mediat[e] disputes among wrongdoers." Second, denying wrongdoers access to the courts plays an important deterrent role. In the past, this defense has been narrowly construed, but in [Perma Life Mufflers, Inc. v. International Parts Corp.] the court observed "the inappropriateness of invoking broad common-law barriers to relief where a private suit serves important public purposes." In [Perma Life] the court observed the antitrust laws "are best served by insuring that the private action will be an ever-present threat to deter anyone contemplating [illegal] business behavior." The court concluded that the "views expressed in [Perma Life] apply with full force to implied causes of action under the federal securities laws. Accordingly, a private action for damages in these circumstances may be barred on the grounds of the plaintiff's own culpability only where (1) as a direct result of his own actions, the plaintiff bears at least substantially equal responsibility for the violations he seeks to redress, and (2) preclusion of suit would not significantly interfere with the effective enforcement of the securities laws and protection of the investing public." Furthermore, the court observed that disallowing the in pari delicto defense will "best promote the primary objective of the federal securities laws– protection of the investing public and the national economy through the promotion of 'a high standard of business ethics … in every facet of the securities industry.' " If the outcome were otherwise, the court stressed the problems the Securities and Exchange Commission would have policing false tipping and the importance of deterring insider trading by corporate insiders and broker-dealers.
Discussion. This case provides a very good discussion of how the in pari delicto defense allows those with culpability to bring court actions to protect broader interests.