Chiarella v. United States

Insider-trading liability and the duty to disclose or abstain.

Vincent Chiarella worked at a financial printer handling confidential takeover materials. He inferred the identities of target companies from documents, bought their shares before public announcement, and was convicted of securities fraud.

The Court reversed the conviction because Chiarella owed no duty of disclosure to the shareholders from whom he purchased shares.

Justice Powell reasoned that silence in securities trading is not fraudulent absent a duty to disclose arising from a fiduciary or similar relationship of trust and confidence. Mere possession of nonpublic market information did not create a general duty to all market participants.

1. How does the rule affect information production, investor reliance, and enforcement costs?
2. What are the likely error costs for lawful market activity and for undetected misconduct?