Business Associations Keyed to Hamilton
Chiarella v. United States
While employed as a printer at Pandick Press, Chiarella (Defendant) was exposed to documents of one corporation revealing its plan to attempt to secure control of a second corporation. Although the identities of the corporations were hidden by blank spaces or false names until the true names were sent over the night of the final printing, Defendant had deduced the names of the target companies beforehand from other information contained in the documents. He did not reveal any of this information to the prospective sellers and then purchased charges in the target corporations. After the takeover attempts were made public, he sold them and realized a gain more than $30,000 over 14 months. An investigation was initiated by the SEC, which concluded with Defendant’s entering into a consent decree agreeing to return his profits to the sellers of the shares. That same day, Pandick Press fired him. He was then indicted eight months later on 17 counts of violating § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 19b-5. Defendant argued that his silence regarding the information he discovered did not constitute a violation of § 10(b) as he was under no duty to disclose the information to the prospective sellers, because as he was neither an insider nor a fiduciary. The district court instructed the jury that Defendant should be convicted if it found he had willfully failed to notify sellers of target companies securities that he knew of an impending takeover bid that would make their shares more valuable. In affirming the resulting conviction, the court of appeals held that “(a)nyone—corporate insider or not—who regularly receives material non-public information may not use that information to trade in securities without incurring an affirmative duty to disclose.” The Supreme Court granted certiorari.
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