Brief Fact Summary. A tippee, Dirks (Defendant), using inside information obtained from tippers not operating for personal benefit, provided investment advice.
Synopsis of Rule of Law. By trading on inside information, a â€œtippeeâ€ does not violate securities laws if his sources did not disclose the information for personal benefit.
An insider will be liable under Rule 10b-5 for inside trading only where he fails to disclose material nonpublic information before trading in it and thus makes secret profits.View Full Point of Law
Issue. By trading on inside information, does a â€œtippeeâ€ violate securities laws if his sources did not disclose the information for personal benefit?
Held. (Powell, J.) No. By trading on inside information, a â€œtippeeâ€ does not violate securities laws if his sources did not disclose the information for personal benefit. Assured equal access to information is not why the securities laws exist, they exist to prohibit those that have access to inside information from utilizing their privileged titles for personal benefit. Therefore, those who are not insiders cannot violate Rule 10b-5 using inside information because no violations exist for using your title of trust to do so. The only exception is when the tipper/insider uses the tippee as a channel for trading on behalf of himself. This will occur when the tipper achieves a personal gain by offering the information in question.Â In this instance, Dirks was not an insider and there was no proof that gains were received by his sources by giving him information with regard to Equity Funding. Seeing as this is factual, Dirks did not violate Rule 10b-5. Reversed.
Discussion. Chiarella v. United States, 445 U.S. 222 (1980) was a logical follow-up to the current case, and in it an employee of a financial documents printer, Chiarella, found an upcoming transaction due to the him printing memorialization documents. He traded on the information. The court held that Chiarella had failed to violate Rule 10b-5 due to him not being a fiduciary.