## Facts

- Cady, Roberts & Co. was a registered broker-dealer; Robert M. Gintel was a partner who handled trades for multiple discretionary customer accounts, including his wife’s.
- J. Cheever Cowdin was both a representative of the broker-dealer and a director of Curtiss-Wright Corporation, the issuer whose shares were traded.
- Curtiss-Wright’s board voted to reduce its quarterly dividend, information expected to affect the stock’s price.
- The company authorized prompt release of the dividend decision to market channels, but dissemination was delayed for roughly an hour.
- Before public release, Cowdin called Gintel and relayed the dividend reduction; Gintel knew the information was not yet public.
- Immediately after receiving the tip, Gintel placed sell orders in Curtiss-Wright shares for discretionary accounts; the orders executed on the NYSE before public announcement.
- After the dividend cut became public, trading was suspended and the stock price declined, confirming the information’s market significance.
- The NYSE fined Gintel for improper trading activity.
- The SEC instituted administrative disciplinary proceedings alleging willful violations of Exchange Act § 10(b) and Rule 10b-5, and Securities Act § 17(a), and sought sanctions in the public interest; the matter proceeded on stipulated facts under a settlement framework limiting any exchange suspension to 20 days.

## Issues

1. Whether a broker-dealer and its partner commit fraud under Exchange Act § 10(b) and Rule 10b-5, and Securities Act § 17(a), by selling an issuer’s stock while in possession of material, nonpublic information about a dividend reduction received from a corporate director associated with the firm.
2. Whether, in these circumstances, the federal anti-fraud provisions impose a duty to disclose the information before trading or to abstain from trading until disclosure.
3. Whether disciplinary sanctions against the partner and the firm were necessary or appropriate in the public interest.

## Decision

- The SEC found that Cady, Roberts & Co. and Gintel willfully violated Exchange Act § 10(b) and Rule 10b-5, and Securities Act § 17(a).
- The SEC concluded the dividend reduction information was material and nonpublic when Gintel traded.
- The SEC determined that trading on such information without disclosure constituted a deceptive practice within the meaning of the anti-fraud provisions.
- The SEC imposed disciplinary sanctions in the public interest, including suspending Gintel from the NYSE consistent with the settlement’s 20-day cap, and imposed appropriate discipline on the firm as registrant.

## Legal Principles

- Material, nonpublic corporate information may not be used for trading advantage by persons who obtain it through a relationship of trust or confidence connected to the issuer or the market.
- A person in possession of material, nonpublic information obtained through such a relationship must either disclose the information before trading or abstain from trading until the information is publicly disseminated.
- Fraud under § 10(b)/Rule 10b-5 and § 17(a) can consist of nondisclosure coupled with trading when the trader’s informational advantage results from a breach of duty; an affirmative misstatement is not required.
- Duties under the anti-fraud provisions extend beyond formal corporate insiders to others who receive confidential information through “special relationships,” including those who trade after receiving a director’s tip under circumstances indicating confidentiality.
- Broker-dealers may be disciplined where insider-trading violations occur in connection with discretionary customer trading, reflecting the firm’s responsibility to prevent misuse of confidential issuer information.

## Conclusion

The SEC held that a broker and broker-dealer violated federal anti-fraud provisions by selling stock for discretionary accounts while aware of a nonpublic dividend cut learned from an issuer director affiliated with the firm, and it imposed public-interest sanctions reflecting a disclose-or-abstain duty for those who obtain confidential corporate information through relationships of trust.


In re Cady, Roberts & Co., 40 S.E.C. 907 (1961)