Defendant J. Thomas Talbot sat on the Board of Directors of Fidelity National Financial, Inc., which owned a 10 percent interest in LendingTree, Inc. In April 2003, LendingTree’s CEO informed Fidelity’s Vice President that LendingTree was proceeding with negotiations for a third party to acquire LendingTree. Several days thereafter, at a Fidelity Board of Directors meeting, Fidelity’s CEO informed the Board (including Talbot) of the LendingTree negotiations, including that Fidelity’s stock in LendingTree would be acquired at “a very attractive price.” Two days after the Board meeting Talbot purchased 5000 shares of LendingTree, and, six days later, he purchased an additional 5000 shares.

The Securities and Exchange Commissionbrought a civil action against Talbot alleging he had engaged in insider trading in violation of Section 10(b) of the Securities Exchange Act. Talbot moved for summary judgment, which the district court granted. The district court held that Talbot could not be liable under the SEC’s misappropriation theory because the SEC failed to prove that either Talbot or Fidelity owed a fiduciary duty to LendingTree and, thus, could not show a “continuous chain of fiduciary relationships” linking Talbot to LendingTree, which the district court characterized as the “originating source” of the information on which Talbot traded. The Ninth Circuit reversed.

The Ninth Circuit explained that under the misappropriation theory the recipient of material, non-public information violates Section 10(b) if he breaches a fiduciary duty that he owes to his source of the information by using the information in an undisclosed and self-serving manner. The court ruled that the district court had erred, however, in ruling that a continuous chain of fiduciary duties that goes beyond the trader’s source of information is required for liability under the misappropriation theory. To the contrary, the Ninth Circuit held that to prove insider trading it was sufficient for the SEC to prove that Talbot knowingly breached a fiduciary duty he owed to Fidelity, i.e., his source of the information on which he traded. Based on this holding, the Court had little trouble finding that Talbot could be liable under the misappropriation theory because, as a member of Fidelity’s Board, he owed a fiduciary duty to Fidelity. (S.E.C. v. Talbot, 2008 WL 2574513 (9th Cir. June 30, 2008))