US SUPREME COURT DECISIONS

Respondent investors (hereafter respondents) filed a damages action in Federal District Court, alleging that they incurred substantial trading losses after a securities broker (employed by petitioner) and the officer of a corporation fraudulently induced respondents to purchase stock in the corporation by divulging false and materially incomplete information about the corporation on the pretext that it was accurate inside information. Respondents contended that this alleged scheme violated, inter alia, § 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 promulgated thereunder. The District Court dismissed the complaint on the ground that, because respondents themselves had violated the same laws under which recovery was sought by trading on what they believed was inside information, they were in pari delicto with the broker and corporate insider, and thus were barred from recovery. The Court of Appeals reversed.

Held: There is no basis at this stage of the litigation for applying the in pari delicto defense to bar respondents' action. Pp. 472 U. S. 306-319.

(a) An implied private damages action under the federal securities laws may be barred on the grounds of the plaintiff's own culpability only where (i) as a direct result of his own actions, the plaintiff bears at least substantially equal responsibility for the violations he seeks to redress, and (ii) preclusion of suit would not significantly interfere with the effective enforcement of the securities laws and protection of the investing public. Cf. Perma Life Mufflers, Inc. v. International Parts Corp., 392 U. S. 134. Pp. 472 U. S. 306-311.

(b) Because a tippee's duty to disclose material nonpublic information typically is derivative from the insider-tipper's duty, the tippee in these circumstances cannot be said to be as culpable as the tipper whose breach of duty gave rise to the tippee's liability in the first place. Moreover, insiders and broker-dealers who selectively disclose material nonpublic information about the issuer commit a potentially broader range of violations than do tippees who trade on the basis of that information. Absent other culpable actions by a tippee that can fairly be said to outweigh these violations by insiders and broker-dealers, the tippee cannot chanrobles.com-red

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properly be characterized as being of substantially equal culpability as his tippers. Pp. 472 U. S. 311-314.

(c) Denying the in pari delicto defense in such circumstances will best promote protection of the investing public and the national economy. First, allowing a defrauded tippee to bring suit against his defrauding tipper promotes the important goal of exposing wrongdoers and rendering them more easily subject to civil, administrative, and criminal penalties. Second, deterrence of insider trading most frequently will be maximized by bringing enforcement pressures to bear on the sources of such information -- corporate insiders and broker-dealers. Third, insiders and broker-dealers will in many circumstances be more responsive to the deterrent pressures of potential sanctions. Finally, there are means other than the in pari delicto defense to deter tippee trading. Although there might well be situations in which the relative culpabilities of tippees and their sources merit a different mix of deterrent incentives, in cases such as the instant one, the public interest will most frequently be advanced if defrauded tippees are permitted to bring suit and to expose illegal practices by corporate insiders and broker-dealers to full public view for appropriate sanctions. Pp. 472 U. S. 315-319.

730 F.2d 1319, affirmed.

BRENNAN, J., delivered the opinion of the Court, in which WHITE, BLACKMUN, POWELL, REHNQUIST, STEVENS, and O'CONNOR, JJ., joined. BURGER, C.J.,concurred in the judgment. MARSHALL, J., took no part in the decision of the case. chanrobles.com-red

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