In re Investors Management Company, Inc.

Douglas Aircraft Company, Inc. (Douglas) manufactured commercial aircraft. Immediately before June 20, 1966, Douglas’s earnings outlook was favorable. On June 20, however, Douglas informed Merrill Lynch Pierce, Fenner & Smith, Inc. (Merrill), the underwriter for Douglas’s proposed debenture offering, that Douglas’s financial performance was substantially below expectations. This bad news was quickly conveyed to various Merrill salesmen, who in turn conveyed it to employees of Investment Management Company, Inc. and other professional investors (collectively, tippees) (defendants). The tippees knew Merrill was underwriting the planned debenture offering. Between June 21 and June 23, the tippees sold almost all of their Douglas shares and also short sold a significant number of Douglas shares. Douglas’s share price sank dramatically once Douglas publicly disclosed its bad news. The Securities and Exchange Commission (SEC) brought an administrative proceeding against the tippees, alleging they engaged in insider trading in violation of § 17(a) of the Securities Act of 1933, § 10b of the Securities Exchange Act of 1934, and SEC Rule 10b-5 (collectively, the insider-trading laws). An SEC hearing examiner ruled against the tippees, ordering that they be censured. The SEC conducted a limited review of the hearing examiner’s decision. In that proceeding, the tippees argued that they did not violate the insider-trading laws because they did not have a special relationship with either Douglas or Merrill and because they received the relevant information indirectly (rather than from Douglas or the Merrill underwriters). The tippees further argued that because they managed money for others, they had a fiduciary duty to their clients to act on the information they received.