A cliché that maintains its usefulness is that “bad cases make bad
law.” It covers a variety of situations, all capturing the essential truth
that peculiar fact patterns run a heightened risk of churning out ill advised
precedent. Dirks v. SEC is one such case.
By its own admission, the Supreme Court referred to the factual
record in Dirks as an “unusual one.” Elsewhere, the Court opined that
the case presented “extraordinary facts” in contrast to “more typical
situation[s].” And, it is from this case that we have the governing
standard for tipper-tippee insider trading liability.
To make matters worse, insider trading law itself has a curious
pedigree. Although Congress failed to explicitly prohibit the practice in
the Securities Act of 1933 (“1933 Securities Act”) and Securities
Exchange Act of 1934 (“1934 Securities Exchange Act”) (collectively,
the “Securities Acts”), the Securities and Exchange Commission
(“SEC”) has successfully persuaded the courts that Rule 10b-5’s
prohibition on fraud in the purchase or sale of securities reaches insider
trading as well.