Question: Susan Waldbaum was a niece of the president and controlling shareholder of Waldbaum, Inc. Susan's mother (the president's sister) told Susan that the company was going to be sold at a favorable price and that a tender offer was soon to be made. She told Susan not to tell anyone except her husband, Keith Loeb, about the sale. (Loeb did not work for the company and was never brought into the family's inner circle, in which family members discussed confidential business information.) The next day, Susan told her husband of the sale and cautioned him not to tell anyone because "it could possibly ruin the sale."
The day after he learned of the sale, Loeb told Robert Chestman, his broker, about the sale, and Chestman purchased shares of the company for both Loeb and himself. Chestman was later convicted by a jury of, among other things, trading on misappropriated inside information in violation of SEC Rule 10b-5. [United States v. Chestman, 947 F.2d 551 (2d Cir. 1991)]
1. On appeal, the central question was whether Chestman had acquired the inside information about the tender offer as a result of an insider's breach of a fiduciary duty. Could Loeb-the "tipper" in this case-be considered an insider?
2. If Loeb was not an insider, did he owe any fiduciary (legal) duty to his wife or his wife's family to keep the information confidential? Would it be fair of the court to impose such a legal duty on Loeb?