Under the misappropriation theory, corporate outsiders are prohibited from trading based on material, non-public information (MNPI) in breach of a duty owed to the source of the information, not to the counterparty. The misappropriation theory premises liability on a trader’s deception of those who entrusted him with access to confidential information, thereby defrauding the principal of the exclusive use of that information. The relevant question is whether the source disclosed the information with an expectation of confidentiality, that is, with the expectation that such information would not be shared with other parties. It is sufficient to prove that the tipper knew or had reason to know that the information was disclosed in a confidential manner.1
The DOJ and SEC have pursued insider trading charges against external service providers, lawyers, accountants, and family members of corporate insiders under this theory.
1 See United States v. O’Hagan, 521 U.S. 642, 652 (1997).