In this Comment, I discuss the evolution and current application of the misappropriation theory of insider trading and argue that it simply strays too far from the fraud tenets of Section 10(b) and Rule 10b-5. A thorough understanding of the misappropriation theory is possible only if one understands how it diverges from the classic theory of insider trading. Therefore, in Section II, I discuss the evolution and present doctrine of classic insider trading. The discussion in this Section focuses on major cases in the development of this theory. Section III presents the misappropriation theory of insider trading. Section III focuses upon (1) the broad scope of the misappropriation theory as initially adopted by the Second Circuit in United States v. Carpenter, (2) the Circuit's later attempt to limit the scope of the theory in United States v. Chestman, and (3) the effect that Chestman has had on limiting the scope of the theory. Section III ultimately shows that the misappropriation theory strays far from the fraud prohibitions of Section 10(b) and has no identifiable limits, thereby proscribing conduct that is not properly regulated by Section 10(b) and Rule 10b-5. Finally, Section IV presents alternative ways to achieve the valuable public policy of the misappropriation theory. Section III concludes that new rules prohibiting the use of material, nonpublic information for an improper purpose should be promulgated under the authority granted to the SEC by Section 10(b).
Troy Cichos, The Misappropriation Theory of Insider Trading: Its Past, Present, and Future, 18 SEATTLE U. L. REV. 389 (1995).