Also known as:fiduciary duty claim · fiduciary duties claims · breach of fiduciary duty · fiduciary breach claims
Written by attorneys · grounded in primary & secondary sources — see below
A cause of action alleging that a person in a position of trust has breached duties of loyalty or care owed to a principal, beneficiary, or entity. The claim requires proof that the fiduciary placed personal interests ahead of those owed or failed to act with the required diligence, allowing recovery of secret profits, rescission, or damages.
Sources & Authorities
How it applies
Common Examples
6
Promoter Secret Profit Recovery
Francois Fortier, planning to form Frostline Textiles, bought equipment on his own account and then caused the new corporation to purchase it from him at a markup. He disclosed the transaction only to the lead investor. After incorporation, the corporation discovered the markup and sued Fortier for breach of fiduciary duty. The court allowed recovery of the secret profit because full disclosure and ratification had not reached all contemplated initial shareholders.
Merger Disclosure Challenge
Felicia Fuentes, a minority shareholder in Fisher Foods, received an information statement for a cash-out merger engineered by the controlling parent. The statement omitted the parent's valuation methods and the fact that the price was below fair value. Fuentes sued alleging that the controlling shareholder breached fiduciary duties by structuring the merger to freeze out minorities without fair disclosure. The court dismissed the federal securities claim because the complaint alleged only a breach of fiduciary duty without any material misrepresentation or omission.
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Cases
Uniform Acts
Restatements
Hornbooks
Santa Fe Industries, Inc. v. Green430 U.S. 462 (1977)
Aiding and Abetting Bar
Faith Fitzgerald served as indenture trustee for bonds issued by Fusion Power. Central Bank of Denver knew the issuer was in financial distress yet released collateral without investigating. First Interstate Bank, a bondholder, sued the indenture trustee and Central Bank for aiding and abetting a breach of fiduciary duty. The court held that no private right of action exists for aiding and abetting under the federal securities laws even when fiduciary duties were breached.
Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A.511 U.S. 164 (1994)
Proxy Statement Fairness Claim
Francisco Frost, majority shareholder of Foster Forge, proposed a merger and issued a proxy statement asserting that the price was fair. Minority shareholder Frederick Ferguson sued claiming the statement was materially misleading because it omitted the board's belief that the price was inadequate. The court dismissed the federal claim because the statement expressed an opinion rather than a false fact and no breach of fiduciary duty claim was independently actionable under the securities statute.
Virginia Bankshares, Inc. v. Sandberg[501 U.S. 1083, 1090-1098] (1991)
Misappropriation Trading Liability
Farid Farahani, a law firm partner representing a client planning a tender offer, purchased target stock for his own account using confidential information. After the tender offer was announced he sold at a profit. The government charged him with securities fraud based on breach of fiduciary duty to the client. The court upheld liability because the misappropriation of information in breach of fiduciary duty satisfied the deception element of Rule 10b-5.
United States v. O’Hagan521 U.S. 642, 650-652 (1997)
Tippee Fiduciary Breach Claim
Fusion Power's inside counsel tipped material nonpublic information to a friend who then traded. The SEC sued the tippee alleging he knew or should have known the tip violated the insider's fiduciary duty. The court held that the tippee could be liable only if the insider breached a fiduciary duty for personal benefit and the tippee knew of that breach.
Dirks v. Securities and Exchange Commission463 U.S. 646, 655, n.14 (1983)
Common questions
Frequently Asked
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What must a plaintiff prove to recover secret profits from a corporate promoter?+
The plaintiff must show that the promoter sold property to the corporation at a profit without full disclosure to and approval by all persons contemplated as original investors. Partial disclosure to some subscribers is insufficient. Upon such proof the corporation may recover the secret profit or rescind the transaction.
Supporting sources
Does a breach of fiduciary duty alone support a federal securities fraud claim?+
No. A breach of fiduciary duty must be accompanied by a material misrepresentation or omission to be actionable under Rule 10b-5. Pure breaches of fiduciary duty without deception fall outside the federal securities laws.
Can a plaintiff sue for aiding and abetting a breach of fiduciary duty under section 10(b)?+
No. The Supreme Court has held that no private right of action exists for aiding and abetting under section 10(b) even when the primary actor breached fiduciary duties.
When does a tippee incur liability for trading on inside information?+
A tippee is liable only if the tipper breached a fiduciary duty by disclosing the information for personal benefit and the tippee knew or should have known of that breach.
521 U.S. 642 (1997)Business Associations
…nonpublic information relating to a tender offer—exceeds the SEC's § 14(e) rulemaking authority because the Rule contains no breach of fiduciary duty requirement. The Eighth Circuit further concluded that O'Hagan's mail fraud and money laundering convictions rested on violations of the securities laws, and therefore could not stand once…