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The linchpin of federal securities law is full disclosure of information in order that investors have the opportunity to make informed investment decisions. An administrative device created to implement this theme is rule l0b-5, promulgated pursuant to section 10(b) of the Securities Exchange Act of 1934. Because section 10(b) is a catchall provision designed to prevent fraudulent activities, the Securities and Exchange Commission (SEC) and the judicial branch have had to delineate the parameters of l0b-5.

Perusal of the generic language of l0b-5 reveals that false statements and misleading half-truths, made in the purchase or sale of any security, are clearly prohibited. The unlawful nature of nondisclosure of material nonpublic information, however, is not specifically addressed. The rule simply does not state “whether silence may constitute a manipulative or deceptive device.” Unlike active misrepresentation, failure to disclose material nonpublic information, prior to trading securities, amounts to fraud only when the silence is in breach of an affirmative duty to disclose. The duty to disclose, established by administrative and judicial decisions, has devolved upon corporate insiders, the tippee of an insider, and one standing in a special relationship with the purchaser or seller of the security. Absent one of these essential relationships, with the corporation affected by the information or with the injured party, the case unanimously hold that there is no duty to disclose.

Recently, an alternative theory was proffered, extending the duty to disclose to the market insider, a person who regularly receives material nonpublic information. Although the United States Supreme Court, in United States v. Chiarella, expressly rejected this novel concept, it is useful, analytically, in examining the scope of the duty to disclose under l0b-5.

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