Generally, corporate “outsiders”—persons with no direct or derivative fiduciary duty to a corporation or its shareholders—have been held liable for insider trading only when they had a fiduciary or fiduciary-like relationship with the source of the material, non-public information on which they traded. After a period of controversy and uncertainty, the Supreme Court, in United States v. O’Hagan,1 adopted the so-called “misappropriation” theory and thereby appeared to make clear the circumstances in which a corporate outsider would be liable. In O’Hagan, the Court held “that a person commits fraud ‘in connection with’ a securities transaction, and thereby violates §10(b) and Rule 10b-5, when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information.”2
Two recent cases—a district court decision from the Western District of Texas and a Second Circuit decision—illustrate that the precise contours of the misappropriation theory are still uncertain and the subject of continuing judicial development.
‘SEC v. Cuban’
