## Facts

- The SEC brought a civil enforcement action alleging that Barry Switzer and others engaged in insider-trading–type conduct by purchasing Phoenix Resources Company stock based on nonpublic information.
- Switzer had experience in oil and gas ventures but held no position with Phoenix or Texas International Company (TIC), Phoenix’s controlling shareholder.
- George Platt, TIC’s chairman/CEO and a Phoenix director, attended a track meet with his wife; Switzer was also present.
- Switzer and Platt were acquaintances and spoke casually about their sons and general investment matters, but did not discuss Phoenix or any planned transaction.
- While Switzer was nearby, Platt privately told his wife that a Phoenix liquidation might occur the following week; the Platts did not intend Switzer to hear and did not know he had overheard.
- After the meet, Switzer checked Phoenix’s stock price, told friends the information came from “someone who should know,” and he and associates purchased a substantial block of Phoenix shares.
- Shortly thereafter, a Phoenix transaction was publicly announced (a merger involving a TIC subsidiary), Phoenix’s stock price increased, and the traders profited.
- Platt later learned of the trading; the SEC sought relief under § 10(b) of the Securities Exchange Act and Rule 10b-5 after a bench trial.

## Issues

1. Whether purchasing stock based on material nonpublic information inadvertently overheard from a corporate insider violates § 10(b) and Rule 10b-5.
2. Whether an outsider who merely overhears such information owes any fiduciary or similar duty to the issuer, its shareholders, or the information source sufficient to make trading deceptive.
3. Whether the SEC proved scienter where the defendant did not solicit the disclosure and had no clear reason to know the information was confidential or improperly disclosed.

## Decision

- Judgment was entered for Switzer; the SEC failed to prove a § 10(b) and Rule 10b-5 violation.
- Switzer was not an insider of Phoenix or TIC and had no relationship imposing a duty of confidentiality to Platt or Phoenix shareholders.
- Switzer was not liable as a tippee because Platt did not intentionally disclose information to him and therefore did not commit a tipper breach that could be imputed to Switzer.
- The court found insufficient evidence of the scienter required for securities fraud under Rule 10b-5 on these facts.
- The SEC’s requested relief, including injunctive relief, was denied.

## Legal Principles

- Rule 10b-5 insider-trading liability generally requires trading in breach of a fiduciary or similar duty of trust and confidence, not merely trading while better informed.
- Tippee liability depends on an insider’s intentional disclosure in breach of duty (typically involving a personal benefit) and the recipient’s knowledge or reason to know of that breach; absent a tipper breach, there is no derivative tippee liability.
- A person who passively overhears information in a casual setting, without a trust-based relationship to the source or issuer and without inducing the disclosure, is not treated as a tippee for § 10(b)/Rule 10b-5 purposes.
- Scienter is required for § 10(b) and Rule 10b-5; inadvertent receipt of information and lack of indicia of confidentiality can defeat proof of deceptive intent or recklessness.

## Conclusion

The court held that federal antifraud law did not reach an outsider’s trading based solely on an inadvertently overheard remark where there was no fiduciary-like duty, no intentional tipping that could create tippee liability, and no adequate showing of scienter.


Securities & Exchange Comm’n v. Switzer, 590 F. Supp. 756 (W.D. Okla. 1984)