Written by attorneys · grounded in primary & secondary sources — see below
A gain obtained by a fiduciary from a transaction conducted on behalf of the principal without the principal's knowledge and consent after full disclosure. The fiduciary must surrender the gain to the principal regardless of whether the principal suffered any loss.
Sources & Authorities
How it applies
Common Examples
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Promoters Sell Land With Hidden Markup
Santiago Sanchez and Sierra Santos promoted the formation of a new corporation to develop municipal projects. Before incorporation they caused their partnership to convey land to the planned corporation at a substantial markup. They disclosed the profit only to two wealthy backers who later ratified the deal. The corporation later sued to recover the markup after discovering that trade investors contemplated as original shareholders had received no disclosure.
Analyst Tips Inside Information For Personal Gain
Samuel Soto, an analyst at a brokerage, learned material nonpublic information about a client corporation through his employment relationship. He tipped the information to Sasha Stone, who traded on it and split the resulting profits with Soto. The SEC brought an enforcement action alleging that Soto had made secret profits by exploiting information intended solely for corporate purposes.
Select any source to read its text and confirm it supports the definition.
Cases
Hornbooks
Dirks v. Securities and Exchange Commission463 U.S. 646, 655, n.14 (1983)
Officers Trade On Confidential Corporate Data
Steven Silva and Sarah Sullivan, officers of a publicly traded company, learned through their positions that the firm would soon report disappointing earnings. They sold their shares before the announcement and realized substantial gains. The corporation sued the officers to recover those gains as secret profits obtained by exploiting information acquired in their fiduciary capacity.
Diamond v. Oreamuno24 N.Y.2d at 497-499, 248 N.E.2d at 912-913, 301 N.Y.S.2d at 80-82
Government Employee Uses Position For Undisclosed Gain
Sterling Manufacturing hired Samuel Soto, a government procurement officer, to negotiate a supply contract. Soto steered the contract to a vendor that paid him an undisclosed consulting fee. The government later discovered the payment and sued to recover it as a secret profit obtained through misuse of his official position.
United States v. Bryan58 F.3d 933 (4th Cir. 1995)
Common questions
Frequently Asked
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Must a principal prove actual loss to recover a secret profit from an agent?+
No. The duty of loyalty requires the agent to surrender any undisclosed gain obtained in connection with the agency even if the principal suffered no economic harm or received fair value. Recovery rests on the agent's unjust enrichment rather than on proof of loss to the principal.
Supporting sources
Does disclosure to some but not all contemplated original investors satisfy a promoter's duty regarding a secret profit?+
No. A promoter must make full disclosure to and obtain approval from every person contemplated as part of the original financing scheme. Partial disclosure to only some initial subscribers leaves the promoter's profit subject to recovery by the corporation.
Supporting sources
Can an agent keep a side payment from a third party if the principal ultimately benefits from the transaction?+
No. The duty of loyalty prohibits the agent from retaining any profit arising from the agency relationship unless the principal consents after full disclosure. The fact that the principal received a fair or beneficial deal does not excuse the secret profit.
Supporting sources
Does forming a separate entity allow a fiduciary to retain profits from an opportunity learned through the fiduciary relationship?+
No. Using a controlled entity does not relieve the fiduciary of the obligation to disclose and account for profits obtained from information or opportunities acquired in the fiduciary capacity. Courts look to substance rather than form.
Supporting sources
463 U.S. 646, 655, n.14 (1983)Business Associations
…10b-5 for inside trading only where he fails to disclose material nonpublic information before trading on it and thus makes "secret profits." Cady, Roberts, supra , at 916, n. 31. III We were explicit in Chiarella in saying that there can be no duty to disclose where the person who has traded on inside information "was not…