SEC v. Maio

United States Court of Appeals for the Seventh Circuit · 1995 · Corporations

51 F.3d 623 (7th Cir. 1995)

Updated August 22, 2026

CorporationsSecurities regulationInsider tradingTender offersSection 10(b)Rule 10b-5Section 17(a)Section 14(e)

Facts

Anacomp's chairman, president, and chief executive officer, Louis Ferrero, told his friend Michael Maio that Anacomp was negotiating a tender offer for Xidex, and Maio passed the information to Patricia Ladavac. After Ferrero's June 6-7, 1988 Las Vegas meeting with Xidex's president and after later calls between Ferrero and Maio, Maio and Ladavac sold Anacomp stock and bought Xidex stock in a pattern closely tied to those contacts. When Anacomp publicly announced the tender offer on July 12, 1988, Xidex stock rose sharply and Anacomp stock fell, allowing Maio and Ladavac to realize profits on Xidex and avoid losses on Anacomp. At trial they denied tipping and claimed their trading was based on public information, but the district court found Ferrero had improperly gifted confidential information to Maio, who tipped Ladavac, and that both traded knowing the disclosure was improper.

Issue

Whether Maio and Ladavac were liable under § 10(b), Rule 10b-5, and § 17(a) as tippees who traded on material nonpublic information that Ferrero improperly disclosed, and whether Rule 14e-3 validly imposed liability for their tender-offer-related trading. The court also had to decide whether Anacomp had taken a substantial step toward commencing its tender offer by June 6-7, 1988 and whether information about that meeting was material.

Rule

A tippee assumes a derivative fiduciary duty not to trade on material nonpublic information when the insider breached a fiduciary duty by improperly disclosing the information and the tippee knew or should have known of that breach. An insider's disclosure is improper when confidential corporate information intended only for corporate purposes is used for personal advantage, including as a gift to a trading friend. Under misappropriation theory, trading on material information misappropriated from its lawful possessor can violate § 10(b) and Rule 10b-5 even when the trader is not an insider of the corporation whose stock is traded. Rule 14e-3 validly prohibits trading while in possession of material nonpublic information relating to a tender offer after the offeror has taken a substantial step toward commencing the offer, regardless of a fiduciary relationship.

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

Nora Velez is chief executive officer of Red Mesa Systems, a public company based in Phoenix. She tells her longtime friend Evan Pike over dinner in Denver that Red Mesa plans to make a tender offer for another company, adding that she is only sharing it because she wants him to make money; Evan immediately sells Red Mesa shares and buys shares of the target.

Is Evan most likely liable under Section 10(b) and Rule 10b-5 for his trades?

Explanation. The majority held that a tippee is liable when the insider breached a fiduciary duty by improperly disclosing material nonpublic information and the tippee knew or should have known of that breach. An improper disclosure includes using confidential corporate information for personal advantage, including gifting it to a trading friend. That rule supports liability for both selling the offeror's stock and buying the target's stock.