IS YOUR CLIENT AN "INSIDER"?

Under the Securities Exchange Act provision concerning manipulative and deceptive devices, "insiders" with a duty to disclose or abstain from trading generally include officers, directors, and majority or controlling shareholders.

Under the Securities Exchange Act provision concerning manipulative and deceptive devices[FN49] and the Securities and Exchange Commission's Rule 10b-5 thereunder, a corporate insider must either disclose information or abstain from trading in the stock of the corporation, as discussed supra § 180. Insider status is normally reserved for officers, directors, controlling shareholders, and those having a special relationship affording access to inside information.[FN50] The test to determine "insider status" is whether the person has access to confidential information intended to be available only for corporate purposes and not for the personal benefit of anyone.[FN51]

The class of insiders generally includes officers,[FN52] directors,[FN53] and majority[FN54] or controlling[FN55] stockholders. However, the class extends also to other persons,[FN56] provided they possess inside information by virtue of their position with respect to the corporation.[FN57] It has also been held that a person is an insider only if he occupies a trusted position in the corporation,[FN58] and that the fact that an employee works with sensitive information does not necessarily make him an insider.[FN59]

An insider trading violation requires proof not only that the defendant traded on the basis of material nonpublic information but also that in doing so he knew or should have known that he was breaching a fiduciary duty. Unifund SAL, 910 F.2d at 1039, citing Dirks v. SEC, 463 U.S. 646, 660, 103 S.Ct. 3255, 3264, 77 L.Ed.2d 911 (1983); Chiarella v. United States, 445 U.S. 222, 230-32, 100 S.Ct. 1108, 1115-17, 63 L.Ed.2d 348 (1980). 79A C.J.S. Securities Regulation § 181

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