Individuals in California and around the country who purchase or sell securities after receiving confidential information are often, but not always, guilty of insider trading. To determine whether or not the law has been broken, the Securities and Exchange Commission uses what is known as the Dirks test. The test gets its name from a 1983 U.S. Supreme Court decision.
Dirks v. SEC
The case involved a securities analyst who learned that an insurance company had engaged in fraud. The analyst did not own any of the insurance company’s stock, but he shared what he had learned with people who did. Some of these people then profited by liquidating their positions before the fraud was exposed. The justices ruled that the analyst did not violate the Securities Exchange Act and commit a white-collar crime because he did not make a profit on the confidential information. They also ruled that the analyst did not have a fiduciary duty to disclose the fraud because he did not have a financial relationship with the insurance company.
Corporate insiders have a fiduciary duty to protect sensitive confidential information, and the Supreme Court ruled in Dirks v. SEC that this duty is assumed by any individual who receives the information as long as they knew or should have known that it should have been protected. Individuals who do not actually buy or sell stocks can still be guilty of insider trading if they breach a fiduciary duty by disclosing confidential information to others in return for a benefit of some kind. This benefit could be a cash payment, an employment opportunity or reciprocal information.
The securities laws are extremely complex, and determining whether or not they have been violated can be difficult for juries. This is why prosecutors are often reluctant to argue these cases in court. When their clients are accused of insider trading, criminal defense attorneys with experience in cases involving white-collar crimes may study the facts to determine whether a fiduciary duty existed and a personal benefit was received in exchange for confidential information.