Recently, I enjoyed watching My Name is Bill W., a 1989 movie that starred James Woods, JoBeth Williams and James Garner. The film tells the story of Alcoholics Anonymous co-founder William Griffith Wilson (aka Bill W.). In telling his story, the film details Wilson’s work on Wall Street during the 1920s. According to the film, Wilson decides that his brokerage firm would make a lot more money if it researched the firms in which it invested. Wilson’s plan was to travel to the companies’ facilities and gather intelligence. One scene shows Wilson in a bar dejected about the tight lips at General Electric. Being a gregarious fellow, he chats up his bar mates who happen to be GE researchers. They invite him for an unauthorized, after-hours tour of GE’s research facilities. Dazzled by what he sees, Wilson becomes a star at his brokerage firm.
A securities lawyer might wonder whether Wilson violated Rule 10b-5 by engaging in illegal insider trading. The easy answer would be no. These events occurred, if at all, in the 1920s, well before the SEC’s adoption of Rule 10b-5 in 1942. See Did Joseph P. Kennedy Make Insider Trading Illegal?
But what if Rule 10b-5 had been in effect? Wilson was not a director, officer or other insider at GE. Thus, Wilson’s liability, if any, would have arisen from his status as a tippee (assuming he traded on the information).
In Dirks v. S.E.C., 463 U.S. 646 (1986), the U.S. Supreme Court explained that a tippee is exposed to liability for trading on inside information only if the tippee participates in a breach of the tipper’s fiduciary duty. According to Dirks, the test for whether the tipper breached his or her fiduciary duty is “whether the insider personally will benefit, directly or indirectly, from his disclosure” Id. at 662. The film doesn’t suggest that the GE researchers benefitted from providing a tour to Wilson or that they were relatives or friends of Wilson. Thus, it appears unlikely that government could have successfully proved a Rule 10b-5 case against Wilson.
Wilson’s case illustrates how the government works against itself by condemning insider trading and at the same time encouraging investors to “get the facts” before investing. Some may argue that Wilson performed a valuable service, not just for his brokerage firm but the entire market, by creatively and energetically ferreting out valuable information about GE. Others may believe that Wilson benefitted from an unfair information advantage. Where is the line? In many cases, we simply don’t know because the courts draw the line after the fact through convictions and acquittals. For example, the U.S. Supreme Court in Salman v. United States, 137 S. Ct. 420 (2016) addressed the narrow issue of whether a tipper breaches a fiduciary duty by making a gift of confidential information to a trading relative (he does), but left for another day “those difficult cases” not involving family or close personal relationships.