Tag: Disclose or Abstain Rule

Staats Smith was a judicial intern with the Delaware Chancery Court this past summer, and plans to work with one of the large Delaware firms during the next. He is a 2L student at Washington and Lee. In this episode of Classroom Insiders, Staats talks about the pivotal case of Dirks v. SEC.

Chiarella was an employee for a financial printing publication, which was used by the company to disclose their material nonpublic information. To avoid premature disclosure, the company developed a code to prevent its employees from trading on the information before it went public. However, Chiarella was able to crack the code, and made hefty profits on his trades as he was always leading it before the news broke. He was convicted for violating the disclose-or-abstain rule by the District Court, which was affirmed by the Second Circuit. Justice Powell decided to reverse the conviction; it was in his view that Chiarella owed no duty to the sellers or shareholders, as he was not an insider or a fiduciary.
Any fiduciary relationship Chiarella had with his employer was not considered due to the application of a judicial waiver, Staats claims; an argument not briefed or argued is deemed waived. The theory of misappropriation was not brought up at all in the District Court, so it could not even be considered on review.
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Tianjiao Lyu studied international business law at Beijing Foreign Studies University. She plans to work at the Clifford Chance Beijing office after graduating from Washington and Lee. In this episode of Classroom Insiders, Lyu talks about insider trading between the 1960s and the 1980s.
 

 
Between 1941 and 1971, the disclose or abstain rule implemented by the SEC had become so expensive that it discouraged the development of the securities market, Lyu states. As a rule, it was not very pro-business. During that time, the SEC was very aggressive in their enforcement of insider trading regulation, and won every case they brought to court about insider trading. This changed, however, when Justice Powell joined the Supreme Court.
 
“Justice Powell’s close interactions with businessmen while lawyering led him to trust in their characters,” Lyu says. “That kind of trust made him hostile to what he saw as excessive regulation, which infringe on free enterprise.” He questioned the SEC’s use of Section 25 and their attempt to expand their reach. It was Powell’s view that the SEC’s rules were unrealistically intended to guarantee investors profit in their investments.
 
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Karen Woody on LinkedIn