Opinion ID: 745324
Heading Depth: 2
Heading Rank: 1

Heading: The Misappropriation Theory of Insider Trading

Text: 16 Flanagan's conviction for insider trading, both as a violation of § 10(b) and Rule 10b-5 and as an object of the conspiracy charge, was based on the so-called misappropriation theory of insider trading. In contrast to the traditional theory of insider trading, under which a corporate insider trades in the securities of his own corporation on the basis of material, non-public information, under the misappropriation theory § 10(b) and Rule 10b-5 are violated whenever a person trades while in knowing possession of material, non-public information that has been gained in violation of a fiduciary duty to its source. See United States v. O'Hagan, --- U.S. ----, ----, 117 S.Ct. 2199, 2202, 138 L.Ed.2d 724 (1997); United States v. Mylett, 97 F.3d 663, 666 (2d Cir.1996), cert. denied, --- U.S. ----, 117 S.Ct. 2509, 138 L.Ed.2d 1013 (1997). Despite our Circuit's long-standing acceptance of the misappropriation theory of insider trading liability, see id. at 667; United States v. Libera, 989 F.2d 596, 599-600 (2d Cir.), cert. denied, 510 U.S. 976, 114 S.Ct. 467, 126 L.Ed.2d 419 (1993); United States v. Chestman, 947 F.2d 551, 566 (2d Cir.1991) (en banc), cert. denied, 503 U.S. 1004, 112 S.Ct. 1759, 118 L.Ed.2d 422 (1992); United States v. Carpenter, 791 F.2d 1024, 1027-31 (2d Cir.1986), aff'd by an equally divided court, 484 U.S. 19, 108 S.Ct. 316, 98 L.Ed.2d 275 (1987); United States v. Newman, 664 F.2d 12, 17-18 (2d Cir.1981), Flanagan argues that we should reconsider its wisdom, citing two cases from other Circuits that held that the misappropriation theory does not support liability under § 10(b) and Rule 10b-5, United States v. O'Hagan, 92 F.3d 612 (8th Cir.1996), rev'd, --- U.S. ----, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997); United States v. Bryan, 58 F.3d 933 (4th Cir.1995). We can quickly dispose of Flanagan's argument. Subsequent to briefing and oral argument in this case, the Supreme Court reversed the Eighth Circuit's judgment in O'Hagan and endorsed the misappropriation theory of insider trading liability. 5 --- U.S. ----, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997). Accordingly, we decline Flanagan's request that we revisit the issue. 17