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The Securities and Exchange Commission (SEC) has a long history of aggressively pushing the boundaries of insider trading liability. One such campaign gave rise to what has become known as the “misappropriation theory,” a now well-established doctrine that expanded the net of the insider trading laws to capture individuals who are not traditional “corporate insiders.”1 The misappropriation theory and its expansive application by the SEC create many pitfalls for professional trading firms such as hedge funds that simultaneously pursue both public and private investments in the same issuer. U.S. District Court for the Southern District of New York Judge Sidney H. Stein’s recent opinion in SEC v. Lyon2 illustrates the dangers to professional investors who engage in such parallel trading strategies without a clear understanding of this complex and sometimes counterintuitive area of the securities laws.

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