Series 82: 1.2.1.7.1. Misappropriation Theory Of Insider Trading

1.2.1.7.1. Misappropriation Theory of Insider Trading

The misappropriation theory of insider trading states that anyone who misappropriates (steals) information from her employer and trades on that information in any stock (whether the employer’s stock or the company’s competitors’ stocks) is guilty of insider trading. Specifically, 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. Trading on a rumor is not considered to be insider trading.

Example: Suppose a representative of a broker-dealer hears material, nonpublic information about a company in a 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 tr