Despite the dispute between the parties concerning whether the defendant had made the representations, the court concluded that no material question of fact existed because it was undisputed that none of the plaintiffs disclosed, in connection with their stock purchases, the inside information which they claimed they possessed. Id. at 1156.
The court stated that the doctrine of in pari delicto would bar a party from recovering damages if his losses were "substantially caused by 'activities the law forbade him to engage in.'" Id. at 1156-57, quoting Perma Life Mufflers, Inc. v. Int'l Parts Corp., 392 U.S. 134, 154, 88 S. Ct. 1981, 20 L. Ed. 2d 982 (Harlan, J., concurring and dissenting) (emphasis in original). The court noted that the doctrine should be applied only when it can fairly be said that the plaintiffs' fault is substantially equal to that of the defendant. Id. at 1157. In addition, before denying recovery, the court must assess the impact of such a result on the enforcement of the statutory scheme. Id. at 1159.
The court first determined that, as a matter of law, plaintiffs' unlawful conduct was of sufficient magnitude to invoke the application of the in pari delicto doctrine. Id. at 1161. As "tippees," plaintiffs were under an obligation either to make full disclosure before engaging in the transactions in question or to refrain from trading until the information was made public. Id. In addition, there was no question but that plaintiffs' misconduct was voluntary. Id. at 1161, 1162. The court appeared to make a general statement that tippees are to be considered in pari delicto with tippers. Id. at 1162. The court explained that the voluntary unlawful acts of the tippees may be said to be a sine qua non of their losses: but for plaintiffs' purchases of the corporation's securities, they would not have suffered any injury. Id.
The court stated that the focus of the inquiry should be on the extent to which the acts of the plaintiff and defendants can be said to be substantial causes of the injury suffered by the plaintiff. Id. at 1162 n.50. Thus, the court concluded that the doctrine should apply. Id. at 1162.
Turning to the second part of the analysis, the public policy considerations, the court stated that the threat of application of in pari delicto would eliminate the "warranty" tippees would have concerning the accuracy of the tip if the tipper were to be held liable. Id. at 1163-64. If tippees could recover for false tips, there would be little incentive for tippees not to use confidential information. Id. at 1164. On the other hand, there are already substantial deterrents for tippers through the possibility of SEC and criminal actions, as well as private suits by non-tippee purchasers and sellers who have been adversely affected by the dissemination of adverse information. Id. Thus, for public policy reasons, the doctrine was held applicable.
Plaintiff contends that this case presents a different picture for several reasons. First, it is not clear from the record that Travis actually had inside information. Second, Travis' position as a broker entails public policy considerations different from those present in Tarasi. At least one district court has held that in a situation in which the broker is not necessarily an insider, but represents that he has inside information, which information turns out to be false, the plaintiff cannot necessarily be considered a tippee. Xaphes v. Shearson, Hayden, Stone, Inc., 508 F. Supp. 882, 885-87 (S.D. Fla. 1981). If the plaintiff is not a tippee, the argument goes, he has no duty to disclose to a prospective seller. Id. at 886, citing Chiarella, supra, at 229. The Xaphes court added that, since the information was not unavailable to the public, the deterrent value of the in pari delicto doctrine is not present. Id. The court concluded that if facts at trial or through discovery revealed that defendants or their agent did indeed have a special relationship giving them access to insider information, the doctrine may be applicable. Id. at 887.
Whether or not the Xaphes decision is compatible with the decision of the United States Court of Appeals for the Fifth Circuit in Kuehnert v. Texstar Corp., 412 F.2d 700 (5th Cir. 1969), this court does not find its reasoning applicable to this case or consonant with the analysis of the Third Circuit in Tarasi. In Chiarella, supra, the Supreme Court cited with favor the SEC's decision in Cady, Roberts & Co., 40 S.E.C. 907 (1961). In Cady, Roberts, the broker-dealer was found liable under section 10(b) because it received non-public information from a corporate insider of the issuer. 445 U.S. at 227 n.8. Since the insider could not use the information, neither could the partners in the brokerage firm with which he was associated. Id. Similarly, a tippee of a broker in that situation cannot trade on inside information.
The only significant difference between the latter situation and that presented in the instant case is that in this case the court does not know for certain that defendant Travis actually possessed inside information from a member of Wainoco's board of directors. This uncertainty does not change the result. The concept of an "insider" has been flexible. Chiarella, supra, 445 U.S. at 250 (Blackmun, J., dissenting).
The term "tipper" has also been defined broadly by the Third Circuit. "A 'tipper' is a person who has possession of material inside information and who makes selective disclosure of such information for trading or other personal purposes. A 'tippee' is one who receives such information from a 'tipper.'" Tarasi, supra, 555 F.2d at 1154 n.1 (citations omitted).
In reaching its determination, the Third Circuit in Tarasi endorsed Judge Aldrich's reasoning in Kuehnert, supra. Id. at 1163. In Kuehnert, Judge Aldrich, speaking for the majority, noted that tippees, although not technically insiders, have a duty under rule 10b-5 to disclose any inside information when making a purchase or sale. Strictly speaking, plaintiff could not have been considered a tippee since the tip received turned out to be inaccurate and, consequently, plaintiff had not in fact withheld material information from his vendors. Id. at 1159. As the Third Circuit noted, this should make no difference inasmuch as the conduct proscribed by rule 10b-5 extended to attempted as well as consummated frauds. Id. at 1159-60.
It is noteworthy that section 10(b) refers to "any manipulative or deceptive device. . . ." This language appears broad enough to encompass certain conduct regardless of its outcome. Kuehnert, supra, at 704. Rule 10b-5(a) prohibits the employment of any "scheme" to defraud and subsection (c) proscribes any act, practice or course of business which operates or would operate as a fraud or deceit. As the court stated in Kuehnert, there is no difference in substance between a successful fraud and an attempted fraud. 412 F.2d at 704. "In determining whether a plaintiff's hands were unclean equity has customarily looked to intent." Id. Thus, when two parties have conspired to cheat a third, and, instead, one cheats the other, no relief is given. Id.
The mere fortuity that Travis may not have been an insider has no bearing upon plaintiff's own acknowledged use of a scheme to defraud and his conduct which would operate as a deceit. If plaintiff is barred from recovery for damages if the tip turns out to be false, there is no justification for granting him relief if, by another fortuity, it turns out that the tipper may not in fact have been an insider. The conduct on plaintiff's part was still voluntary, and the attempted unlawful conduct on his part was a substantial cause of his losses.
Permitting a distinction to be made when the tipper is not in fact an insider would serve to give the tippee the very "warranty" the third and fifth circuits have denied to disappointed tippees. Such a result would not only fail to discourage, but would actually encourage improper use of inside information. If the tipper does not in fact possess inside information, there is relatively little benefit to the public from holding him liable for a false tip, particularly when a tipper who actually possesses and passes on inside information is shielded from liability through application of in pari delicto. Conversely, it is unreasonable to reward a plaintiff, although impure of heart, who is fortunate enough to have his tipper turn out not to be a tipper at all. It would be a confused message to send to parties who decide to make unlawful use of inside information that, if the tip turns out to be false, they should be prepared to prove that the inside information was not in fact from an inside source. Finally, the same concern expressed by the Third Circuit in Tarasi with the difficulty of tracing tippees applies in this instance.
Thus, the policy justifications for applying the doctrine of in pari delicto to a corporate insider apply equally to this case. Accordingly, summary judgment is granted as to the section 10(b) and section 17(a) claims. The section 20 claim will also be dismissed. The state law claims will be dismissed for lack of pendent jurisdiction. The court will enter an appropriate order.