exchange –(b) To use or employ, in connection with the purchase or sale of any security
registered on a national securities exchange or any security not so registered, or any securities-
based swap agreement any manipulative or deceptive device or contrivance in contravention of
such rules and regulations as the Commission may prescribe as necessary or appropriate in the
public interest or for the protection of investors. (Securities and Exchange Act of 1934, 2012)
Although not explicitly deﬁned in current statutes, various federal and state courts,
including the U.S. Securities and Exchange Commission (SEC), have developed and
expanded on the forms, legal standards, defenses and boundaries of insider trading
(Anderson, 2014;Kim,2014;Murdock, 2014;Yeager et al., 2014;Tsepelman, 2015).
Breach of duty
For insider trading to occur, the corporate insider must have breached a ﬁduciary duty to
the corporation by trading on material, nonpublic information (Acoba, 1999;Chiarella v.
USA, 1980; Dirks v. SEC, 1983;Malone, 2003;Silver, 1985). In one case, the Supreme Court
described what has become known as the majority rule, stating that a director owed a
ﬁduciary relationship solely to the corporation and not to the corporate shareholders
(Goodwin v. Agassiz, 1933).Special facts, however, sometimes create a ﬁduciary relationship
between a director and shareholders, legally obliging the director to disclose material facts
before trading on the information(Strong v. Repide, 1909). Special facts existed in Strong v.
Repide (1909) when the director and controlling shareholder of the company used deceit by
hiring an agent to personally approach and purchase the shares from another stockholder,
concealing his identity from the latter. Other courts espouse the minority rule, holding that
directors owed a ﬁduciary duty not only to the corporation but also to the shareholders and
hence, cannot proﬁt by trading on inside information at the expense of shareholders
(Dawson v. National Life Ins. Co. of America, 1916; Hotchkiss v. Fischer, 1930; Oliver v.
Oliver, 1903;Smith,1921; Stewart v. Harris, 1904).
The law on insider trading was expanded to cover not only corporate insiders and
tippees but also misappropriators who use deceit in obtaining material nonpublic
information (i.e. externallawyers hired to assist corporate acquisitions and takeovers) (USA
v. O’Hagan, 1997) and ﬁduciaries who tradeon material nonpublic information conﬁded to
them by family members (Securities and Exchange Commission v. Rocklage, 2006; USA v.
Evans, 2007). The Second Circuit Court of Appeals in Securities and Exchange Commission
v. Dorozhko (2009) further created a category of fraud by afﬁrmative misrepresentation,
holding that breach of ﬁduciary duty is a necessary element of insider trading only when
deception is based on silence or nondisclosure but not when deceit is based on active
misrepresentation, such as computer hacking. The Second Circuit remanded the case,
saying that computer hacking couldbe considered a deceptive device prohibited by Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 (Securities and Exchange
Commission v. Dorozhko,2009).
The case of USA v. Newman (2014) clariﬁed the nature of the tipper’sbreach of duty, the
level of proof required to show suchbreach and the standard of criminal intent or mens rea
for the tippee liability (Malone, 2003;Silver, 1985;Strader, 2015). The insider or
misappropriator must knowingly act with the intent of depriving the owner of the
information for his/her personal gain (Beeson, 1996;Dessent, 1998;Strader, 2015). A tippee
or individual who trades basedon material nonpublic information received from an insider-
tipper is also liable under Section 10-b (Yeager et al., 2014). Within the context of tipper–
tippee liability, the tippermust disclose material, nonpublic conﬁdentialinformation for his/
her personal beneﬁt,“broadly deﬁned to include not only pecuniary gain, but also, inter alia,
any reputational beneﬁt that will translate into future earnings and the beneﬁt one would