CHIARELLA v. UNITED STATES
Petitioner Vincent Chiarella worked in the composing room of Pandick Press (Pandick), a financial printer. An acquiring corporation hired Pandick to produce announcements of corporate takeover bids. Although the identities of the acquiring and target corporations were concealed, Chiarella was able to deduce the names of the target companies. Without disclosing his knowledge, Chiarella purchased stock in the target companies and sold the shares immediately after the takeover bids were made public. Chiarella realized slightly more than $30,000 in profits from his trading activities. The Securities and Exchange Commission (SEC) then investigated Chiarella's trading activities. Chiarella entered into a consent decree with the SEC in which he agreed to return the profits he made to the sellers of the shares. A few months later, Chiarella was indicted on seventeen counts of violating Section 10(b) of the Securities Exchange Act of 1934 (1934 Act) and SEC Rule 10b-5. Section 10(b) of the 1934 Act prohibits the use "in connection with the purchase or sale of any security" of "any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe." Rule 10b-5, promulgated under Section 10(b), makes it unlawful for any person to "employ any device, scheme, or artifice to defraud . . . in connection with the purchase or sale of any security." Chiarella was convicted at trial and the Court of Appeals for the Second Circuit affirmed his conviction.
Did Chiarella violate Section 10(b) of the 1934 Act by failing to disclose the impending takeover before trading in the target company's securities?
Legal provision: Securities Act of 1933, the Securities and Exchange Act of 1934, or the Williams Act
No. A duty to disclose information arises if there is a relationship of trust and confidence between parties to the transaction. Chiarella had no such duty. He was not a corporate insider in the acquiring corporation and he did not receive confidential information from the target company. He also had no fiduciary relationship with the shareholders of the target company: he was not their agent; they placed no trust or confidence in him; indeed, they had no prior dealings with him. A duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information.