SEC Rules 10b5-1 and 10b5-2
In August 2000 SEC Rule 10b5-1 declared that a “manipulative and deceptive device” includes “the purchase or sale of a security of any issuer on the basis of material, nonpublic information about that security or issuer.” On the same day, the SEC recognized the misappropriation theory with Rule 10b5-2, which states that anyone who gains insider information, knows it to be confidential, knows it must be kept confidential, and trades on it anyway (misappropriates it) is guilty of insider trading.
Example: Suppose a representative of a broker-dealer hears material, nonpublic information about a company in a casual conversation at the water cooler, and the employee goes home and tells a neighbor, who promptly buys some of that company’s stock. Both the brokerage employee (tipper) and his neighbor (tippee) are liable for insider trading. A janitor who happens to hear a piece of the conversation while emptying a wastebasket and buys the same stock would probably not be guil