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United States v. O'Hagan
2/20/2024 pdw
Misappropriation is a fancy word for theft. Misappropriation Theory holds that "a person commits fraud in connection with a securities transaction, and thereby violates § 10(b) and Rule 10b–5, when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information." O'Hagan at 652. In other words, the person committed fraud by stealing information that the person had a duty to keep secret. Because it is tied to a duty of confidentiality, rather than the person's position, misappropriation theory can be used against individuals who are not traditional insiders.
Because it is a breach of the securities laws, misappropriation theory claims are available to be brought by the SEC, the Department of Justice or the counterparty to the security trade. Penalties include disgorgement, fines or imprisonment. This case introduces misappropriation theory. In it, a law firm partner is prosecuted for trading on information he overheard in the office.
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