TheCorporateCounsel.net

Earlier this month, former securities analyst Ray Dirks passed away at the age of 89. Dirks was the petitioner in the famous case of Dirks v. SEC, in which the SCOTUS overturned a censure issued against him by the SEC for violating Rule 10b-5’s prohibition on insider trading.  The SEC contended that Dirks, who uncovered & alerted the SEC and The Wall Street Journal to potential corporate wrongdoing, violated the prohibition on insider trading by “tipping” his firm’s clients to what he uncovered.

The SCOTUS rejected that argument, but in overturning Dirks’ censure, it established a standard for tipper/tippee liability that turned on whether or not the tipper violated a fiduciary duty by sharing the information in question.  In a recent blog on the occasion of Dirks’ passing, Gunster’s Bob Lamm points out that this standard has created a lot of confusion and uncertainty about the boundaries of insider trading liability:

I don’t blame the Court for coming up with this rather convoluted route to Dirks’s exoneration; after all, one of my law school professors used to beat us over the head with the notion that courts will sometimes bend over backwards to fashion a remedy where the strict letter of the law leads to an unjust result. That seems to me to be a good thing. Also, I know that I’m in the minority – possibly a very small minority – that believes that the goal of insider trading law should be to create a level playing field rather than to punish breaches of fiduciary duty.

Still, the Dirks case has resulted in decades of confusion over what is – and what is not – insider trading, and I believe that we’d have all been better off if the SEC had not engaged in overzealousness where Dirks was concerned – particularly given the agency’s non-response to the allegations he’d brought to its attention.

– John Jenkins