Brief Fact Summary. Petitioner, Raymond Dirks, received material information from insiders who wanted Petitioner to report fraudulent practices in their company. Petitioner tipped clients and investors by disclosing the information to them.
Synopsis of Rule of Law. A tippee owes a fiduciary duty to shareholders if the tippee received material nonpublic information from an insider that breached his fiduciary duty by disclosing the information, and the tippee knows of the breach.
The tippee's duty to disclose or abstain is derivative from that of the insider's duty and the tippee's obligation arises from his role as a participant after the fact in the insider's breach of a fiduciary duty.View Full Point of Law
Issue. The issue is whether Petitioner violated Section:10(b) when he disclosed material nonpublic information to clients and investors.
Held. The United States Supreme Court held that Section:10(b) should not be read so broadly as to hold tippees liable when they use inside information received by insiders who were not breaching their fiduciary duties in their disclosure. The Court held that the insider must first breach a fiduciary duty and then the tippee’s conduct will be examined to see if they breached a duty.
Dissent. The dissent reasoned that the shareholders are injured when anyone else benefits from information not publicly disclosed, so the court should not distinguish between information given to tippees from insiders breaching a duty from those who are not breaching a duty.
Discussion. The Court leaves it for the legislature to extend the statute if they want to punish what may be unethical behavior by tippees. But an argument can be made that shareholders benefit when insiders, such as in this case, disclose the information to someone, especially when the insiders do not personally seek a benefit.