Insider trading continues to be a high priority area for the U.S. Securities and Exchange Commission’s enforcement program. The SEC brought 57 insider trading enforcement actions in 2011 and, in 2012, brought 58 insider trading enforcement actions against 131 individuals and entities. Yet despite the SEC’s intense and persistent attention to insider trading enforcement and the headline grabbing nature of the SEC’s enforcement actions, many in the financial and business community remain unfamiliar with the origins and legal basis for the prohibition against insider trading in the United States and the exact conduct that is proscribed. This article will focus on the primary theories of insider trading liability.
General Principles
Prohibited "insider trading" is, in a nutshell, the purchase or sale of securities on the basis of material, non-public information in breach of a duty arising out of a fiduciary relationship or other relationship of trust and confidence. The statutory basis for this prohibition against insider trading is Section 10(b) of the U.S. Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. Section 10(b) and Rule 10b-5 are general anti-fraud provisions that make it unlawful for any person to engage in any act, practice or course of business that would operate as a fraud or deceit upon any other person in connection with the purchase or sale of a security. It is from this general anti-fraud provision as well as common law principles of fiduciary duty that the prohibition against insider trading and the two primary theories of insider trading liability (which are known as the "classical" theory and the "misappropriation" theory) evolved.
