Chiarella v. United States

Brief Fact Summary. Petitioner traded on confidential information acquired during his work at a financial printer regarding the possible takeover of a corporation without first disclosing this information to the public.

Synopsis of Rule of Law. A duty to disclose arises under section 10b under the Securities Exchange Act of 1934 when there is a relationship of trust and confidence between the transacting parties.

Facts. Petitioner worked for a financial printing company, Pandick Press, as a markup man. Petitioner handled documents announcing corporate takeover bids. The names of the acquiring and takeover corporations were disguised, but Petitioner was able to deduce the companies by other information on the documents. Petitioner purchased stock in the target companies and sold the shares immediately after the takeover attempts were announced to the public, making $30,000 in profit over a 14 month period.
In May 1977, Petitioner entered into a consent decree with the Securities Exchange Commission (SEC) to return his profits to the sellers of the shares. In January 1978, he was indicted and later convicted on 17 counts of violating Section: 10b and SEC Rule 10b-5. The Court of Appeals for the Second Circuit affirmed his conviction. The United States Supreme Court granted certiorari. The issues involving Rule 10b-5(b) were dismissed.

Issue. Whether a person who learns about a corporation’s plan to takeover a target corporation through confidential papers discovered while working at a financial printer violates Section:10b if he fails to disclose the impending takeover before trading in the target company’s securities?

Held. No. Silence does not amount to fraud under Section:10(b) if there is not a duty to disclose based on a confidential relationship between the transacting parties. The Court of Appeals decision is reversed.
Dissents.
The language of Rule 10b-5 and Section:10b encompasses the principle that a person has an absolute duty to disclose misappropriated nonpublic information or to refrain from trading if he does not disclose.

Petitioner’s conduct was fraudulent under the meaning of Section:10(b) and Rule 10b-5 because he wrongfully acquired confidential information and participated in manipulative trading based on it.

Discussion. Silence in connection with the purchase or sale of securities is actionable as fraud under Section:10(b) if there is a duty to disclose such information arising from a relationship of trust and confidence between parties to a transaction. Here, Petitioner did not have a duty to disclose because he had no special confidential relationship with the transacting parties.