tip

Dirks was an investment analyst who learned from a former employee of Equity Funding that the company had been fraudulently manufacturing insurance policies. Dirks tipped several institutions which then liquidated $16 million in Equity Funding stock before the fraud was exposed and the bottom fell out of the market. According to the Court, Dirks was a hero for (eventually) exposing the fraud. The SEC's censure of Dirks for tipping inside information was reversed because, the Supreme Court held, the liability of a tippee derives from that of the tipper. If the tipper is without sin, so is the tippee. Here, the employee's purpose in informing Dirks was to expose the fraud, so the tipper breached no duty. Moreover, according to the Court, for there to be a breach of duty, there must be personal benefit (in the form of pecuniary gain or reputational benefit that will translate into future earnings) arising to the tipper from the disclosure.