From: dlv@bwalk.dm.com (Dr.Dimitri Vulis KOTM)
Date: Tue, 4 Jun 1996 15:52:32 +0800
To: cypherpunks@toad.com
Subject: Re: Saw this on CNN: Anonymous Stock tips over IRC as bad???
In-Reply-To: <Pine.SUN.3.91.960603144035.8479A-100000@polaris>
Message-ID: <mmaZoD50w165w@bwalk.dm.com>
MIME-Version: 1.0
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Black Unicorn <unicorn@schloss.li> writes:
> I direct you to Dirks v. Securities and Exchange Commission, 463 U.S. 646
> (1983).

rev'g 681 F.2d 824 (D.C.Cir.1982), SEC. Rel #34-17480 (Jan 22, 1981).

> Specifically footnote 14:
>
> "Under certain circumstances, such as where corporate information is
> revealed legitimately to an underwriter, accountant, lawyer, or
> consultant working for the corporation, these outsiders may become
> fiduciaries of the shareholders....  When such a person breaches his
> fiduciary relationship, he may be treated more properly as a tipper than
> a tipee...."
>
> This circumstance is classically refered to as a "footnote 14 insider."
>
> It has been held to apply to lower level employees within the corporation
> who "knowingly trade based on material non-public information acquired by
> virtue of their position within the company."

The poor Dirks was a financial analyst who "received information from a
former vice president of Equity Funding that there was widespread fraud at
the company. Dirks confirmed this information with one current and several
former Equity Funding employees and communicated it to five investment
advisors. The five investment advisors sold or directed the sale of large
blocks of Equity Funding stock without disclosure of the information they
had received from Dirks. The SEC found that once Dirks had confirmed the
information by contact with a number of former insiders, it had a
reasonable probability of being true and was, for that reason, material
nonpublic information. The SEC also held that Dirks aided and abetted
violations of Section 10(b) on the part of the investment advisors who were
his tippees. The decision was upheld by the Court of Appeals but _reversed
by the Supreme Court on the grounds that the insider did not breach his
fiduciary duty by disclosure of the information because there was no benefit
to the insider, and thus Dirks did not breach any duty." I.e., Dirks got
away with it, after spending lots of $$$ on shysters.

IANAL, but I see a trend to let insiders get away with trading on material
non-public information in Chiarella v. U.S. (455 US 222 (1980)) followed by
Dirks.

---

Dr.Dimitri Vulis KOTM
Brighton Beach Boardwalk BBS, Forest Hills, N.Y.: +1-718-261-2013, 14.4Kbps