Dirks v. Securities & Exchange Commission
463 U.S. 646 (1983)


Facts: Dirks (D), an officer of a New York brokerage firm that specialized in providing investment analysis of insurance company securities to institutional investors, received information from Secrist, a former officer of Equity Funding of America, that Equity Funding's assets were vastly overstated through the corporation's fraudulent practices. Secrist told Dirks (D) that other regulatory agencies failed to act on similar claims brought by other Equity Funding employees. Dirks (D) decided to investigate Secrist's story and interviewed several Equity Funding officers and employees. Equity Funding's senior managers denied any wrongdoing, but some other Equity Funding employees verified Secrist's claims. Although Dirks (D) did not own Equity Funding stock, he informed some of his clients of the claims. As a result, some of the shareholders sold their Equity Funding shares, including five investors whose combined liquidated holdings exceeded more than $16 million. Dirks (D) investigated Equity Funding for two weeks. During that time, the price of Equity Funding's stock fell from $26 to $15per share. This dramatic drop led the New York Stock Exchange to cease trading of Equity Funding's stock. California insurance authorities reviewed Equity Funding's financial records and uncovered evidence of fraud. After this discovery, the SEC filed a complaint against Equity Funding, and the Wall Street Journal published a front-page story on the fraudulent activity. After a hearing concerning Dirks' (D) role in exposing the fraud, the SEC (P) found that irks (D) had aided and abetted violations of antifraud provisions of the Securities Exchange Act by repeating the fraud allegations to members of the investment community who later sold their stock. However, because Dirks also brought the fraud to light, the SEC only censured him.

Issue: Will a tippee automatically be liable for openly disclosing nonpublic information received from an insider? Does a person who receives a stock top from an insider stand in the shoes of that corporate insider under Rule 10b-5 only when the corporate insider has breached a fiduciary duty and the tippee knows or should have known that the tip was a breach of fiduciary duty by the corporate insider?

Rule: An individual not related to a corp. that receives material nonpublic information from a tippee assumes a fiduciary duty to the shareholders of the corporation not to trade on the information only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach.

Holding:Reversed.
The Supreme Court, Justice Powell, held that petitioner, who received material nonpublic information from “insiders” of a corporation with which he had no connection, had no duty to abstain from use of the inside information that he obtained where the tippers, who were motivated by a desire to expose fraud, received no monetary or personal benefit from revealing the information nor was their purpose to make a gift of valuable information to petitioner; thus, there was no actionable violation of antifraud provisions of federal securities laws resulting from petitioner's disclosure of the information to investors who relied on it in trading in the shares of the corporation.

Dissent: (Blackmun, J.) The majority creates a special motivational requirement on the fiduciary duty doctrine. This new requirement excuses a knowing and intentional violation of an insider's duty to shareholders if the insider does not personally benefit. Such a requirement is not justified.