Dirks v. Securities and Exchange Commission

PETITIONER: Raymond L. Dirks
RESPONDENT: Securities and Exchange Commission
LOCATION: Securities and Exchange Commission

DOCKET NO.: 82-276
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: United States Court of Appeals for the District of Columbia Circuit

CITATION: 463 US 646 (1983)
ARGUED: Mar 21, 1983
DECIDED: Jul 01, 1983
GRANTED: Nov 15, 1982

ADVOCATES:
David Bonderman - on behalf of Petitioner
Paul Gonson - on behalf of Respondent

Facts of the case

In 1973, Raymond Dirks was an officer of a New York-based firm that specialized in providing investment analysis of insurance company securities to institutional investors. On March 6, he received insider information that Equity Funding of America, a corporation engaged primarily in selling life insurance and mutual funds, had vastly overstated assets as a result of fraudulent company policies. Dirks did not do any business with Equity Funding, but he decided to investigate and, during the investigation, discussed his information with investors who did hold Equity Funding stock. Some of these people sold their stock based on Dirks’ information. Dirks also urged the Wall Street Journal to publish an article on the fraud allegations, but it would not for fear of the story being libelous. The drop in Equity Funding’s share price caused the New York Stock Exchange to halt trading on March 27 and the Securities and Exchange Commission (SEC) began an investigation. On April 2, the Wall Street Journal ran a story that was based largely on Dirks’ information, and the SEC then began investigating Dirks’ role in the affair.

In their investigation of Dirks’ actions, the SEC found that he had aided and abetted the violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 by informing other members of the investment community of the fraud allegations. However, because he assisted in exposing the fraud, Dirks was only censured. Dirks appealed to the U.S. Court of Appeals for the District of Columbia Circuit, which affirmed the SEC’s decision.

Question

Did Dirks’ actions violate the antifraud provisions of the federal securities laws?

Media for Dirks v. Securities and Exchange Commission

Audio Transcription for Oral Argument - March 21, 1983 in Dirks v. Securities and Exchange Commission

Warren E. Burger:

We will hear arguments first this afternoon in Dirks against the Securities and Exchange Commission.

Mr. Bonderman, you may proceed whenever you are ready.

David Bonderman:

Thank you, Mr. Chief Justice, and may it please the Court:

Ten years ago today, in fact virtually at this hour, Petitioner Dirks was in the office of Stanley Goldblum, Chairman of the Board, President, and Chief Executive Officer of then high flying Equity Funding Corporation of America.

Justice White, it was at 10:00 in the morning, California time.

[Laughter]

Mr. Dirks was there to confront Mr. Goldblum with uncorroborated allegations of a former officer... a fired former officer of a subsidiary to the effect in relevant part that the major foundations of the company, its life insurance subsidiary, were a fraud and that the company was carrying on its books substantial amounts of "phony policies" which were being sold to reinsurers as though they were real in a Ponzi scheme.

Mr. Goldblum, of course, denied all, arranged for a meeting which lasted much of the day with all of the other major officers of the company in an endeavor to persuade Mr. Dirks that these allegations were entirely spurious and were being circulated by a disgruntled former fired employee who, although Mr. Dirks hadn't mentioned his name, Mr. Goldblum knew who it was.

Secrist had come to Dirks ten days earlier with these and other allegations, some of which ultimately proved to be true, some of which proved to be false.

He had come to Dirks because Dirks had a reputation as an analyst who was willing to investigate beyond just looking at reports, the bottom line financial analysis, because as the Court of Appeal below found the Securities and Exchange Commission had a history of failing to act promptly in dealing with what has come to be known as the Equity Funding Scandal, the SEC having been informed by one of its own former attorneys a year and a half earlier and having taken essentially no action, a quick investigation which was closed.

The SEC again being informed within two days of Mr. Dirks, but again concluding that there was nothing there and not taking any action at that time.

Secrist had the idea that in view of the performance by the regulators and in view of the notion within the company that the company had connections through its associate general counsel to the SEC, which made it clear that the SEC would never act, and through its vice president of the Illinois Insurance Commission, which also assured that the Insurance Commission which had regulatory authority would never act, the only way to public's eyes what Secrist believed, though, as he admitted he had no proof, was a major, perhaps the major fraud in corporate America at the time was to have somebody like Dirks go out, do such investigation as he could and to publicize those allegations in the only way a securities analyst can by telling everybody he can get his hands on with the result that the trading in the stock would cause an adjustment in the price--

Sandra Day O'Connor:

Mr. Bonderman, we are dealing here, I guess, only with the activities of Mr. Dirks in those few days before he went to the SEC.

David Bonderman:

--That is correct, Justice O'Connor, from the 7th of March until the 26th of March.

Sandra Day O'Connor:

Why shouldn't he have gone in the first place to the SEC and then gone ahead and done all of the things that he did?

David Bonderman:

Well, there are two answers to that.

I would like to start with the second one if I might.

The second one is that the SEC's position is that even if he had he would have violated the law because it is no defense that you reported it to the SEC--

Sandra Day O'Connor:

Well, but I suppose you could argue to us that it should be a defense that he reported it to the SEC.

That is another question.

David Bonderman:

--That brings me to what I suppose, perhaps, should have been my first.

It was reported to Dirks by Mr. Secrist that the SEC was aware and had been informed in 1971.

That was correct.

The Courts below so found--

Sandra Day O'Connor:

But isn't it his obligation to go as a broker/dealer to the SEC?

You would acknowledge that at some point it is his obligation?

Would you, or would you not?

David Bonderman:

--Well, the answer to that is, I would say first, if he has an obligation to go to the SEC at all--

Sandra Day O'Connor:

Does he ever, in your view, have an obligation?

David Bonderman:

--I believe not, but I believe that that is not material here because under the facts present what he had was a rumor, an unverified allegation, perhaps more than a rumor, but certainly less than fact, of the sort that goes on in the market all the time.