In Dirks v. SEC, the U.S. Supreme Court held that a recipient of nonpublic material information from an insider has a duty to either disclose before trading or abstain from trading if the insider’s “tip” breached the insider’s fiduciary duty, to wit, if “the insider personally will benefit, directly or indirectly, from his disclosure.” 463 U.S. 646, 662 (1983) (Powell, J.). The court explained that “[a]bsent some personal gain, there has been no breach of duty to stockholders,” and “absent, a breach by the insider, there is no derivative breach.” Id.
As stated in Dirks, the initial breach of duty inquiry “requires courts to focus on objective criteria, i.e., whether the insider receives a direct or indirect personal benefit from the disclosure[.]” Id. at 663. Justice Lewis Powell explained that “ [t]here are objective facts and circumstances that often justify such an inference,” citing, as an example, “a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the particular recipient.” Id. at 664. “‘The theory…is that the insider, by giving the information out selectively, is in effect selling the information to its recipient for cash, reciprocal information, or other things of value for himself.’” Id., quoting Brudney, “Insiders, Outsiders, and Informational Advantages Under the Federal Securities Laws,” 93 Harv. L. Rev. 324, 348 (1979). Powell predicted (correctly, as it turns out) that “[d]etermining whether an insider personally benefits from a particular disclosure, a question of fact, will not always be easy for courts.” Id.
