Donna M. Nagy (Indiana University Maurer School of Law) has posted Beyond Dirks: Gratuitous Tipping and Insider Trading on SSRN. Here is the abstract:
This essay suggests a framework for evaluating tipper-tippee insider trading cases in the wake of the Second Circuit’s decision in United States v. Newman. It argues that Newman improperly construed tipping and trading as offenses that are hermetically sealed by the Supreme Court’s decision in Dirks v. SEC and the particular policy objectives that underlie its statutory construction. The essay aims to break through that barrier by emphasizing three post-Dirks developments that often will be critical to determining whether or not a person’s disclosure of material nonpublic information constitutes fraud in violation of Securities Exchange Act Section 10(b) and Rule 10b-5: 1) the Supreme Court’s endorsement of the misappropriation theory of insider trading in United States v. O’Hagan, 2) the SEC’s decision to effectively ban the practice of selective disclosure through its adoption of Regulation FD (Fair Disclosure), and 3) state court decisions that have construed breaches of the fiduciary duty of loyalty to include not only self-dealing but also actions taken in bad faith, such as deliberate conduct not in a corporation’s best interest. Although the latter development may not typically come to mind when considering the federal prohibition of insider trading, state law can offer federal courts immensely valuable guidance as to whether a fiduciary’s disclosure of entrusted information may be deemed a fraud that violates Rule 10b-5.