Series 28: Misappropriation Theory Of Insider Trading

Misappropriation Theory of Insider Trading

The misappropriation theory states that anyone who misappropriates (steals) information from her employer and trades on that information in any security is guilty of insider trading. The rule sets forth three factors for determining whether a duty of trust or confidence was owed by the person who received the information. SEC Rule 10b5-2 states that anyone who gains insider information, knows it to be confidential, knows it must be kept confidential, and trades on it anyway is guilty of illegal insider trading. A person receiving confidential information under circumstances specified in the rule would owe a duty of trust or confidence and thus could be liable under the misappropriation theory.

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