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SEC v. Materia

United States Court of Appeals for the Second Circuit · 1984 · Corporations
745 F.2d 197 (2d Cir. 1984)
Updated
CorporationsSecurities regulationInsider tradingMisappropriationSection 10(b)Rule 10b-5misappropriation theorymaterial nonpublic information

Facts

Materia worked as a copyholder at Bowne, a financial printing firm that handled highly sensitive tender-offer documents for corporate clients. Despite efforts to conceal target identities and Bowne's explicit policy forbidding employee trading on client information, Materia deduced the identities of at least four tender-offer targets from confidential drafts between 1980 and 1982. Within hours of each discovery he bought stock in the target company, then sold after the offers became public for substantial profits. The district court found that he had misappropriated confidential information, breached a fiduciary duty to Bowne and its clients, and acted with actual knowledge of that duty.

Issue

Does an employee who misappropriates material nonpublic information from his employer and its clients, in breach of a fiduciary duty, and then trades on that information for personal profit violate Section 10(b) and Rule 10b-5? In an SEC enforcement action, must the fraud be based on a duty to disclose to the persons on the other side of the securities transaction?

Rule

One who misappropriates material nonpublic information in breach of a fiduciary duty and trades on that information to his own advantage violates Section 10(b) and Rule 10b-5. In an SEC enforcement action, the relevant inquiry is the scope of the Rule itself; the absence of a duty to disclose to the trading counterparty does not preclude liability where the defendant defrauded the source of the information and the fraud was in connection with securities trading.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.
Elena Ruiz works in Phoenix for Desert Slate Document Services, which prepares confidential merger and tender materials for corporate clients. Although client drafts use code names, Elena pieces together the target company's identity from share counts and dividend data, then buys the target's stock that afternoon and sells two days later after the bid is announced publicly.

In an SEC enforcement action, is Elena most likely liable under Section 10(b) and Rule 10b-5?

Explanation. The majority held that one who misappropriates material nonpublic information in breach of a fiduciary duty and trades on it to personal advantage violates Section 10(b) and Rule 10b-5. Liability does not depend on being a traditional insider of the target, nor on direct deception of the trading counterparty in an SEC enforcement action.