463 U.S. 646 (1983)
- An insider of a banking group informed D that the company had inflated their assets on the balance sheet. The insider told D about the inflated assets, suggesting that the company should be investigated for fraud.
- D was an officer at a brokerage investment firm.
- D actually took additional steps to investigate the fraud and interviewed the company’s employees, who confirmed such information.
- D contacted the WSJ newspaper to make the information public in order to expose the fraud.
- Meanwhile, D told other investors and his clients about the fraud.
- Investors and clients sold their shares in accordance with his advice.
- The SEC investigated the company and found fraud.
- However, the SEC also looked into D’s behavior and found him guilty of trading on insider information.
- Whether 10b insider trading violation occurs when the information is made public to expose the fraud and also traded upon when it’s non-public.
- No, D is not guilty of fraud.
- The court held that (1) the insider’s behavior must first be evaluated to discover whether the tippee breached his/her fiduciary duty, then (2) the tippee’ behavior must be evaluated to see if he/she breached a duty
- If the tippee received material insider information from someone (an insider) who has a fiduciary duty to shareholders and a duty to disclose. BUT, the tippee must also know there is a breach of fiduciary duty.
- Thus, the tippee is liable is he is knowingly furthering the insider’s concealment of the material non-public information and/or continuing the spread of material non-public information.