Insider Trading
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Insider Trading vs. Misappropriation
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There is another illegal activity that is closely related to insider trading – it’s called misappropriation. Misappropriation occurs when a non-insider steals material company information and uses that information for his or her personal benefit. This law is a fairly recent one, stemming from the case U.S. v. O’Hagan, 521 U.S. 642 (1997). In O’Hagan, a lawyer represented a corporation and became aware of inside information in his role as the lawyer for the company. The lawyer then bought a few million dollars worth of stock based on the inside information, and was found guilty of misappropriation. Why? Because the lawyer took private material company information and used it for his own personal benefit to the detriment of the corporation’s shareholders.

So, how is misappropriation different than insider trading? In O’Hagan, the lawyer was not an insider, or at least a traditional insider. The lawyer was not a director, officer, or even a shareholder of the corporation where he learned about the inside information. In other words, the lawyer did not owe any fiduciary duties to the corporation. However, according to the court that didn’t matter. The lawyer used private information that he was aware of for his own personal benefit to the detriment of others – and that’s called misappropriation.

The key to remember is that even individuals who are not insiders can be convicted of misappropriation. As another example, if an accountant learns of private material information through a discussion with a company’s board of directors, then uses that information to sell or purchase a stock (which he or she wouldn’t have otherwise done), then that could constitute a misappropriation of the information. The accountant had no fiduciary duty to the company, but the accountant’s use of that information breached the board of director’s fiduciary duties to their shareholders – and that could be enough to be held liable under the concept of misappropriation.

Another thing to remember is that a non-insider can generally only be held liable for misappropriation if he or she acts upon that information, such as purchasing or selling a stock. In contrast, insiders can be held liable for private material information that they learn of and do nothing about. In other words, insiders have fiduciary duties to the corporation’s shareholders to tell them about private material information, while non-insiders that hear that information simply must refrain from acting upon it. This is a very subtle difference in the law, but an important one to remember. The law is all about subtle distinctions!

Next, let’s take a look at how someone can be "tipped off" to inside information.

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