United States v. Chestman case brief

 United States v. Chestman (2nd Cir. 1991)

• This case deals with liability of the tippee of a misappropriator (remote tippee)
• Ira was President and CEO of Waldbaums, which was about to be acquired by A&P.
• Ira told his sister, Shirley, who told her daughter, Susan who told her husband, Keith.
• Keith then told his broker Chestman, who went out and bought Waldbaums stock.
• Keith is the alleged misappropriator. Chestman is liable if Keith owed and breached a fiduciary duty to his wife that Chestman knew or should have known about.
• What constitutes a fiduciary relationship?
  • The common law has recognized that some associations are inherently fiduciary, including attorney and client, executor and heir, guardian and ward, principal and agent, trustee and trust beneficiary, and senior corporate official and shareholder.
  • But what if we don’t have one of these traditional fiduciary relationships? Look for the essential characteristics of a relationship of trust and confidence, which are dependence and influence.
• What about the family context?
  • Mere family relationships or marriage is not enough.
  • Need to show evidence of repeated disclosure of business secrets.
• The jury in this case was not given any evidence of past disclosures. Keith owed neither the Waldbaum family or Susan a fiduciary duty or its functional equivalent and did not defraud them by disclosing news of the pending tender offer to Chestman. No Rule 10b-5 violation.
• The court says Chestman still violated Rule 14e-3 (just have to prove they traded on nonpublic material information about a pending tender offer).

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