## Facts

- Raymond L. Dirks, a securities analyst at a broker-dealer, investigated Equity Funding of America after receiving allegations from a former company officer that the company’s assets were overstated through fraud.
- Dirks traveled to the company’s headquarters, interviewed officers and employees, and obtained corroboration of fraudulent practices from certain employees despite management denials.
- Dirks and his firm did not own or trade Equity Funding securities.
- Dirks discussed the information with clients and investors; several sold Equity Funding holdings, including advisers who liquidated more than $16 million in securities.
- Dirks attempted to interest the financial press in the allegations; a major newspaper initially declined to publish a story.
- As the investigation progressed, the stock price fell, trading was halted, and state authorities seized records and uncovered evidence of fraud.
- After regulators confirmed the fraud, the SEC pursued enforcement actions; a newspaper later published a story based largely on information Dirks assembled.

## Issues

1. When does a “tippee” incur a duty to disclose or abstain under § 10(b) and Rule 10b-5 based on information received from corporate insiders?
2. Whether an analyst who relays nonpublic information revealing corporate fraud, without trading, can be held liable when insiders disclosed to expose wrongdoing rather than obtain a personal benefit.

## Decision

- The Supreme Court reversed the judgment sustaining the SEC’s action against Dirks.
- The Court held that a duty to disclose or abstain does not arise from mere possession of nonpublic information; it arises from a fiduciary-based breach involving deception.
- A tippee’s duty is derivative and arises only if the insider breached a fiduciary duty by disclosing information and the tippee knew or should have known of the breach.
- The insider’s disclosure constitutes a breach only if made for a direct or indirect personal benefit; disclosures made to expose fraud, without personal benefit, do not create a breach.
- Because the insiders spoke to Dirks to expose fraud and not for personal benefit, there was no breach by the insiders and thus no derivative liability for Dirks.

## Legal Principles

- Rule 10b-5 liability for insider trading is tied to fiduciary duty and “manipulation or deception,” not a general rule requiring equal informational access among market participants.
- Tippee liability requires: (1) an insider’s fiduciary breach through disclosure, (2) the tippee’s knowledge (actual or constructive) of that breach, and (3) a securities transaction connected to the deceptive breach.
- The “personal benefit” requirement is the touchstone for determining whether an insider’s disclosure breaches fiduciary duty; benefit may be pecuniary, reputational with expected future earnings, or inferred from gifting information to relatives or friends.
- If the insider did not breach a fiduciary duty, a tippee has no derivative duty to disclose or abstain based on the information received.

## Conclusion

The Court held that Dirks could not be sanctioned as a tippee because the insiders who disclosed the information did not breach a fiduciary duty for personal benefit; absent a tipper’s breach, there is no derivative Rule 10b-5 duty for the recipient of the information.


Dirks v. Sec. & Exch. Comm’n, 463 U.S. 646 (1983)