CORPORATION AND SECURITIES LAW CASE DIGEST ATTY.

CO-PUA

I. SHORT TITLE: DIRKS V. SECURITIES & EXCHANGE COMMISSION

II. FULL TITLE: Dirks versus Securities & Exchange Commission – 463 U.S. 646, July 1,
1983, J. Powell

III: TOPIC: Other Corporations – Foreign Corporations

IV. STATEMENT OF FACTS:

Petitioner was an officer of a broker-dealer firm who specialized in providing investment
analysis of insurance company securities to institutional investors. Petitioner received
information from a former officer of an insurance company that its assets were vastly overstated
as the result of fraudulent corporate practices. Throughout petitioner's investigation, he discussed
the information with clients and investors, some of whom sold their holdings in the company.

V. STATEMENT OF THE CASE:

When State insurance authorities impounded the company's records and uncovered evidence of
fraud, the SEC filed a complaint against the company. The SEC found that petitioner had aided
and abetted violations of the antifraud provisions of the federal securities laws, including §10(b)
of the Securities Exchange Act of 1934 and SEC Rule 10b-5, by repeating the allegations of
fraud to members of the investment community who later sold their stock in the insurance
company. On review, the Court of Appeals entered judgment against petitioner.

VI. ISSUE:
Whether or not petitioner violated federal securities laws by repeating
allegations of respondent corporation's fraud to investors.

VII. RULING:
No. Unlike insiders who have independent fiduciary duties to both the corporation and its
shareholders, the typical tippee has no such relationships. There must be a breach of the insider's
fiduciary duty before the tippee inherits the duty to disclose or abstain.

Under the inside-trading and tipping rules, petitioner had no duty to abstain from use of the
inside information that he obtained, and thus there was no actionable violation by him. He had no
preexisting fiduciary duty to the insurance company's shareholders. Moreover, the insurance
company's employees, as insiders, did not violate their duty to the company's shareholders by
providing information to petitioner. In the absence of a breach of duty to shareholders by the
insiders, there was no derivative breach by petitioner.

We conclude that Dirks, in the circumstances of this case, had no duty to abstain from use of the
inside information that he obtained.

VIII. DISPOSITIVE PORTION:

The judgment of the Court of Appeals therefore is Reversed.

PREPARED BY: Andrea Rose G. Garcia

CORPORATION AND SECURITIES LAW CASE DIGEST ATTY. CO-PUA