Chiarella v. United States

Supreme Court of the United States · 1980 · Corporations

CorporationsSecurities RegulationInsider TradingRule 10b-5Section 10(b)Rule 10b-5nondisclosureduty to disclose

Facts

Petitioner worked as a markup man at a financial printer and handled documents relating to corporate takeover bids. Although the identities of the acquiring and target corporations were concealed in the draft documents, he deduced the target companies' names from other information in the documents before final printing. Without disclosing his knowledge, he purchased stock in the target companies and sold it after the takeover attempts became public, making slightly more than $30,000. He was later criminally prosecuted under § 10(b) and Rule 10b-5 based on his failure to disclose that information to the sellers.

Issue

Does a person who learns from confidential corporate documents that one corporation plans to acquire another violate § 10(b) and Rule 10b-5 by failing to disclose the impending takeover before trading in the target company's securities, when he is not an insider of the target company and has no fiduciary or similar relationship with the sellers?

Rule

Silence in connection with the purchase or sale of securities is fraudulent under § 10(b) only when there is a duty to disclose arising from a fiduciary or other similar relationship of trust and confidence between the parties to the transaction. Mere possession of material, nonpublic market information does not create a duty to disclose under § 10(b) and Rule 10b-5.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Seattle, Jordan Pike works nights at a document-shredding vendor that services several investment banks. While reviewing bins before disposal, he pieces together enough scraps to learn that a public company will soon be the target of a takeover bid. He buys shares on the open market from anonymous sellers and sells after the bid is announced.

If prosecutors charge Jordan under § 10(b) and Rule 10b-5 solely because he failed to disclose the information to the market sellers before buying, what is the strongest argument for acquittal?

Explanation. Under the majority rule, silence is fraudulent under § 10(b) only when there is a duty to speak arising from a fiduciary or similar relationship of trust and confidence between the parties to the transaction. Jordan traded through impersonal market transactions and was a stranger to the sellers. Mere possession of material nonpublic information, standing alone, is insufficient.