Define: Misappropriation Theory Of Insider Trading

The Misappropriation Theory of Insider Trading is a legal theory that holds individuals liable for insider trading if they misappropriate confidential information for personal gain, even if they are not directly connected to the company whose information they are using.

The Classical Theory of Insider Trading focuses on individuals who are insiders of a company and trade based on material non-public information. In contrast, the Misappropriation Theory targets individuals who obtain confidential information from a source outside the company and use it for personal gain.

Under the Misappropriation Theory, anyone who misappropriates confidential information for personal gain can be held liable, regardless of their relationship with the company whose information they are using. This includes employees, consultants, friends, family members, or any other person who obtains and trades on non-public information.

Confidential information refers to material non-public information that is not yet available to the general public and could impact the company’s stock price if disclosed. This can include financial results, merger or acquisition plans, product developments, or any other information that could affect the company’s value.

To prove a violation of the Misappropriation Theory, prosecutors must establish that the defendant: (a) misappropriated confidential information, (b) knew or should have known that the information was obtained improperly, and (c) used the information to trade securities or tip others who traded based on that information.

Yes, individuals can be held liable for insider trading under the Misappropriation Theory even if they did not directly trade on the information. If they pass on the confidential information to others who then trade based on it, they can still be held accountable for insider trading.

Penalties for violating the Misappropriation Theory can include fines, disgorgement of profits, injunctions, and even imprisonment. The severity of the penalties depends on various factors, such as the amount of profit gained, the level of intent, and the individual’s prior history of insider trading.

Yes, there are several defences that can be raised against allegations of Misappropriation Theory violations. These may include lack of intent, lack of knowledge that the information was obtained improperly, or lack of evidence proving the use of the information for personal gain.

While companies themselves cannot be held liable for insider trading, they can face legal consequences if their employees or agents engage in insider trading using confidential information obtained from the company. Companies are responsible for implementing proper internal controls and compliance programs to prevent such misconduct.

The Misappropriation Theory is primarily recognized in the United States, where it was established by the Supreme Court in the case of United States v. O’Hagan. However, other jurisdictions may have similar legal principles or regulations that address insider trading based on misappropriation of confidential information.