Recent business or financial news has been filled with reports of insider-trading cases that the Securities and Exchange Commission has been or is pursuing. Many of those cases involve large amounts of money, well-known persons or companies, and interesting factual questions. But they do not necessarily raise questions about the theory of insider-trading liability. In mid-July, the SEC settled an insider-trading case against an individual, engaged solely in personal trading activities, in which the disgorged profits were less than $90,000, and the facts of the case point to the limits of the “misappropriation” theory of insider-trading liability.
According the SEC’s complaint, the defendant was Mr. Robert Doyle, who purchased call options on securities of Brink’s Home Security, apparently after he had obtained material non-public information about the proposed acquisition of Brink’s by Tyco International. Mr. Doyle was a friend of an employee of an investment banking firm that represented Tyco. That friend was a house guest of Mr. Doyle in August 2009, and when the friend departed, he inadvertently left in Mr. Doyle’s house a copy of a presentation relating to the proposed acquisition. When Mr. Doyle discovered the copy in December 2009, he began trading in securities of Brink’s.
Mr. Doyle’s friend did not intentionally provide information to, or encourage any trading by, Mr. Doyle. Therefore, the “classical” theory of an insider-trading claim was not applicable, because there was no “insider” of Tyco (or Brink’s) involved in the trading and no “tipper-tippee” relationship. Mr. Doyle’s liability for insider-trading could only be based on the “misappropriation” theory of insider-trading liability, which requires a breach of fiduciary duty or a breach of trust or confidence. Otherwise, inadvertent recipients of material non-public information who trade while in possession of that information would face liability.
It is apparent that Mr. Doyle had an improper intent – i.e., an intent to use the information for his own profit when he knew that the information was not intended for him or for that purpose. Nevertheless, even on the misappropriation theory of insider-trading liability under existing case law, that does not appear to be sufficient to constitute insider-trading. The misappropriation theory, applicable to “outsiders” like Mr. Doyle, requires not only that the material non-public information be misappropriated (i.e., used by someone for a purpose not intended to be used), but also that it be used fraudulently – i.e., in violation of a duty to another person and without disclosure of the proposed use.
The SEC’s complaint states that Mr. Doyle’s trading “breached a legitimate expectation of confidentiality” held by Mr. Doyle’s friend, but it does not describe in detail the facts supporting that “legitimate expectation of confidentiality.” It is an interesting question whether a “legitimate expectation of confidentiality” is equivalent to, or sufficient to give rise to, the duty of “trust and confidence” that is required for the misappropriation theory. The further interesting question is what understanding or facts are sufficient to give rise to a “legitimate expectation of confidentiality.” The SEC’s complaint states that Mr. Doyle knew that his friend “could not, and did not, share material nonpublic information with him.” Was this knowledge the result of a conversation between the two regarding the information, or was it only more general knowledge about the nature of the work in which Mr. Doyle’s friend engaged? If the latter, is that tantamount to the position that it was enough that Mr. Doyle’s friend subjectively believed that Mr. Doyle would not use or misuse the information?
OUR TAKE: Although Mr. Doyle may have misused information that he was not supposed to have – and, perhaps, might be liable for theft of the information under state law – it is not clear that he should have been liable for insider-trading unless there were facts sufficient to establish a duty on his part. Because the SEC’s complaint and settlement release do not describe those facts, it is difficult to tell what constituted that duty.