For the Defense - Volume 2, Issue 2 - 2017 - 30
purposes of Section 10(b) emanates from common
law duties, whether the unique fiduciary duty
that an insider owes his company's shareholders
or a duty of confidentiality owed to the source
of the information.6 Individuals who are bound
by those duties must either disclose material nonpublic information before trading or abstain from
trading altogether.7 But outsiders who come into
possession of inside information are not automatically prohibited from trading, because they owe
no such duties.
In Dirks, the Court examined these principles
in the context of insider tipping. The Court held
that while insiders may not personally trade on
corporate information for their advantage, they
also "may not give such information to an outsider for the same improper purpose of exploiting
the information for their personal gain."8 A tippee
also may not trade, the Court explained, because
he inherits the insider's duty to disclose or abstain
and thus risks becoming "a participant after the
fact in the insider's breach of a fiduciary duty."9
Critically, the Court held that not all disclosures of inside information give rise to liability
for the tipper or tippee. "[T]he test is whether
the insider personally will benefit, directly or
indirectly from his disclosure. Absent some personal gain, there has been no breach of duty to
stockholders. And absent a breach by the insider,
there is no derivate breach."10
Dirks explains what the "personal benefit"
requirement entails. "[C]ourts are not required
to read the parties' minds," the Court said, but
instead should "focus on objective criteria, i.e.,
whether the insider receives a direct or indirect
personal benefit from the disclosure, such as a
pecuniary gain or a reputational benefit that will
translate into future earnings."11 The Court said
that a personal benefit can be inferred if there is
"a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or
an intention to benefit the particular recipient."12
And further, "[t]he elements of fiduciary duty
and exploitation of nonpublic information also
exist when an insider makes a gift of confidential
information to a trading relative or friend. The tip
and trade resemble trading by the insider himself
followed by a gift of the profits to the recipient."13
Arthur Thomas Donato
Law Offices of
Arthur Thomas Donato
216 West Front Street
Media, PA 19063
www.artdonato.com
30
For The Defense | Vol. 2, Issue 2
http://www.artdonato.com
http://www.gpfflaw.com
Table of Contents for the Digital Edition of For the Defense - Volume 2, Issue 2 - 2017
For the Defense - Volume 2, Issue 2 - 2017 - 1
For the Defense - Volume 2, Issue 2 - 2017 - 2
For the Defense - Volume 2, Issue 2 - 2017 - 3
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