So what exactly did the Court hold?
The majority in Dirks determined that insider trading occurred when an insider disclosed material non-public information in breach of a fiduciary duty. The Court, however, used the phrase without any reference to state law. This was presumably intentional. State law would not have supported the analysis. This could be seen in a number of ways.
First, Dirks involved a tip by an officer (or former officer). Under state law, officers had a fiduciary relationship that ran to shareholders. Limiting insider trading to fiduciaries, however, left out more than it included.
Corporate advisers such as accountants and lawyers were not typically fiduciaries. Nor were the persons inside the company delivering the mail or moving boxes at the loading dock. Fiduciary duties extended to officers, directors, and key employees but not everyone working for the corporation. Limiting insider trading to those with a traditional fiduciary obligation would, therefore, exclude large swathes of persons with access to material non-public information from the prohibitions imposed by Rule 10b-5.
Even with respect to officers, problems existed. Fiduciary duties ran to shareholders. Yet insider trading often occurred when officers sold shares aware of impending negative developments. Unless selling to existing shareholders, the insider had no fiduciary obligation to those purchasing the shares until after they became shareholders.
Second, limiting insider trading to instances where the tipper had a fiduciary obligation did not fully accomplish the Court’s goal. Under traditional state law concepts, a fiduciary could violate his or her duties when not acting in the best interests of shareholders. This left officers interacting with market professionals open to claims that they improperly “tipped” information anytime they did so in a context that did not appear to benefit the corporation.
The Court addressed some of these problems and left others unattended. We will look at the analysis in the next post.
With respect to Newman, the decision and the request for rehearing en banc is posted, along with the SEC’s amicus brief, at the DU Corporate Governance web site. The amicus filed by a small group of law professors that supports the decision is here.