Chiarella v. United States

Brief Fact Summary. An employee of a printing company, Chiarella, utilized private information the company printed for profit.

Synopsis of Rule of Law. Failure to disclose private information by those who are not corporate insiders will not be able to be held as liable under Rule 10b-5.

Facts. When working for a printing company printing financial documents, Chiarella utilizing items printed by the company, he grew knowledgeable about a looming takeover attempt.  Buying shares of the takeover target and selling them following the public statement. In accordance with an SEC investigation, Chiarellawas indicted for violations of § 10(b) of the Securities Exchange Act and Rule 10b-5. Chiarella was convicted which was affirmed on appeal. The Supreme Court granted certiorari.

Issue. Can failure to disclose private information by those who are not corporate insiders hold them as liable under Rule 10b-5?

Held. (Powell, J.) No. Failure to disclose private information by those who are not corporate insiders will not be able to be held as liable under Rule 10b-5. A party in a securities case that is charged with nondisclosure must be under a duty to disclose it. The securities laws lack anything to form of a general duty to disclose all pertinent information by sellers and purchasers, however, the law places upon fiduciaries and other insiders such a duty, without that duty being offered to non-insiders. The insider’s duty comes from their responsibility to not make private use of corporate information. Chiarella, in this instance, was not an insider and so had no such duty. Reversed.

Discussion. The current case was a criminal one. It has been recommended that it may not be applicable in a civil action, as the onus of proof isdissimilar. The opinion is lacking anything signaling the onus of proof is related to the court’s decision at all.