As discussed in a Feb. 14, 2013, article by this author, "Insider Trading: Examining Primary Theories of Liability," insider trading has been a top enforcement priority for the Securities and Exchange Commission and will most likely continue to be a top priority for the foreseeable future. In fact, the SEC recently released a statistic that it has instituted more insider trading actions in the last three years than during any three-year period in the agency’s history. Among the recent SEC enforcement actions, cases involving tippers and tippees have featured prominently. This article will focus on the standards of liability for tippers and tippees.
Insider Trading Generally
In brief, illegal insider trading is trading while in possession of material, non-public information in breach of a duty arising out of a fiduciary relationship or other relationship of trust and confidence. There are two primary theories of insider trading liability: the "classical" theory and "misappropriation" theory. The classical theory, which applies to insiders of a corporation, provides that an insider breaches his or her duty of trust and confidence to the corporation and its shareholders when the insider trades on material, non-public information learned by reason of his or her position with the corporation.
