The scenarios are familiar (and especially prevalent in work-from-home environments): A close friend or family member of a corporate insider sees or overhears highly confidential company information, or is entrusted with it by the insider who assumes (and perhaps insists) that it will remain confidential. The friend or family member proves untrustworthy and, without telling the company insider, makes profitable securities trades based on the “misappropriated” information, possibly even “tipping” others who profitably trade.
It is widely accepted that trading in these circumstances can be punished as securities fraud under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. The basic theory is that the trading friend or loved one defrauded the company insider by misappropriating confidential information in violation of a duty of trust and confidence owed to the insider.
But does this kind of personal betrayal really amount to securities fraud? Only if courts continue to accord generous deference to the SEC under at least two controversial Supreme Court precedents.
‘Enforcement 40’ for 2020
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