Chiarella provided the Second Circuit with an opportunity to resolve an important issue on which there previously had been no square holding: whether a person who is not an insider and has no inside knowledge about the company whose securities he is trading nevertheless has a duty to disclose nonpublic material information in his possession about impending stock market events. The court viewed such a person as a "market insider"'" and found a duty to disclose. To evaluate the propriety of imposing liability in this situation, this comment will first trace the development and expansion of liability for nondisclosure under rule 10b-5. Section I concludes that although most of the cases tie the duty to disclose to the defendant's insider status, they can plausibly be read in terms of an underlying regulatory principle of equal access to information. To test this hypothesis, Section I then examines cases involving outsiders who, since they owe no fiduciary duty to the shareholders of an issuer's securities, would have no duty to disclose absent another principle.
Section II of the comment then turns to the legislative history of the Exchange Act to determine if it supports an equal access principle. Section II finds, as did the case law prior to Chiarella, that legislative history fails to provide definitive support for an equal access principle. The comment concludes in Section III, however, that strong policy reasons favor adoption of such a principle.
In section IV the comment focuses on the Chiarella opinion, which adopted the principle of equal access and created a test to effectuate it. The comment concludes by endorsing Chiarella's adoption of the principle, criticizing the test adopted, proposing an alternative one for defining the scope of liability, and exploring its application in a variety of nondisclosure situations involving outsiders.
Place of Original Publication
Wisconsin Law Review
1980 Wis. L. Rev. 162
Kostritsky, Juliet P., "Comment, Rationalizing Liability for Nondisclosure Under 10b-5: Equal Access to Information and United States v. Chiarella," (1980). Faculty Publications. 1117.