Extending Outsider Trading Liability to Thieves

April 2, 2012

This Note addresses the important question of whether all thieves can be held liable for violating section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Over time, the U.S. Supreme Court has cautiously expanded liability for trading on material nonpublic information from corporate insiders only, to tippees, to outsiders standing in a fiduciary relationship to the source of the confidential information. Recently, the Second Circuit held in SEC v. Dorozhko that a thief who owed no duty to the source of misappropriated information could be held liable if he accomplished his theft by means of affirmative misrepresentation. This decision represents the next step in increasing liability for outsider trading.

This Note contends that holding all thieves liable, even those who do not obtain information by means of affirmative misrepresentation, constitutes a logical expansion of liability consistent with section 10(b), Rule 10b-5, and case law. The traditional requirement of a fiduciary relationship between the misappropriator and the source of the information in outsider trading cases results in under-inclusive doctrine that fails to fully satisfy the purpose of the Exchange Act. Expanding liability to include all thieves is sound policy that will better protect investors and the integrity of the market.

April 2012

No. 5