Securities Regulation-Federal Anti-Fraud Provisions-Applicability of Insider Responsibility to Broker in Possession of Inside Corporate Information

During a period of upward movement in the price of Curtiss-Wright common stock, the corporation’s board of directors voted to reduce the stock dividend by forty percent, an action certain to have an immediate adverse effect upon the stock’s market price. Although the board immediately authorized the transmission of information concerning its action to the New York Stock Exchange, an inadvertent delay of forty-five minutes ensued. Unaware of the delay, C, a director of Curtiss-Wright and a registered representative of Cady, Roberts & Co. (registrant) , a registered broker-dealer, telephoned registrant to inform G, one of its partners, of the dividend reduction. G, knowing that this information had not yet been publicized, took advantage of his knowledge by quickly selling on the New York Stock Exchange 9,700 shares of the Curtiss-Wright stock for the discretionary accounts of his customers. Thirty minutes later the news of the dividend reduction reached the Exchange and the price of Curtiss-Wright stock immediately dropped by almost four points. The Securities and Exchange Commission instituted disciplinary proceedings against G and registrant to determine whether the sale violated the federal “anti-fraud” provisions: section 17 (a) of the Securities Act of 1933, section 10 (b) of the Securities Exchange Act of 1934 and rule 10b-5. Held, both G and registrant are subject to sanctions for willfully violating these provisions. Although the “anti-fraud” provisions have traditionally imposed a duty of disclosure upon “insiders,” they also are applicable to any person enjoying a special relationship whereby he has access to confidential corporate information. Cady, Roberts & Co., SEC Security Exchange Act Release No. 6668 (Nov. 8, 1961), CCH 1961 FED. SEC. L. REP. ¶ 76803.