Steve asks if CEO Tony Treadwell has violated Rule 10b-5 by sharing confidential information about a potential merger in the course of seeing his psychologist for therapy. Salman does not tell us much about the outer limits of the personal benefit standard, other than to reaffirm what Dirks told us: a gift of information to a relative or friend for trading meets the standard. Steve’s hypothetical shrink, however, is neither a friend or relative, so we are relegated to the first prong of Dirks personal benefit standard: “whether the insider receives a direct or indirect personal benefit from the disclosure, such as a pecuniary gain or a reputational benefit that will translate into future earnings.” Dirks v. SEC, 463 U.S. 646, 663 (1983).
Mental health is a personal benefit, I suppose, but it is well to remember that the personal benefit standard is simply refining the inquiry of whether the insider has breached a duty by making the disclosure, i.e., was the disclosure self-dealing. Dirks tells us the standard for liability under Rule 10b-5 is “whether the insider’s purpose in making a particular disclosure is fraudulent.” Id. The purpose of the disclosure by Steve’s stressed-out CEO is not to enrich the CEO, as Dirks requires, but to maintain his mental state. This is a personal purpose, as Steve notes, but it hardly constitutes a fraudulent purpose. A fraudulent purpose, within the meaning of Dirks, requires behavior that would be recognizable as self-dealing. Would any board of directors think that Treadwell’s disclosure was a form of stealing from the corporate till? Formulating Steve’s question this way, I am confident that Justice Powell would say no, and that would be the end of the inquiry from his perspective.
Salman does not change that answer, in my view. The only doctrinal news of note from Salman is the Court’s rejection of the Government’s “noncorporate purpose” standard. The Government’s standard might well have reached Treadwell’s hypothetical disclosure, which underscores the Court’s common sense in rejecting “noncorporate purpose” as the measure of a personal benefit. Absent an explicit broad-ranging prohibition enacted by Congress, what counts as fraud under Rule 10b-5 has to be defined by traditional categories of breach of duty, which give at least some guidance in finding the line between permissible and criminal behavior.
That said, if I am Treadwell’s lawyer, I tell him not to share that information with his psychologist. The cost and headache of dealing with an SEC or DOJ investigation are not worth it. (Note that when Treadwell shared the information with me for the purpose of seeking legal advice, he arguably had a “noncorporate purpose”: saving himself from personal liability. But no one—not even the SEC—would dare suggest that this disclosure to counsel would violate the personal benefit standard.)