The Misappropriation Theory of Insider Trading

Classic insider trading law was originally built around company insiders — executives, board members — who owe a direct duty to their own shareholders and breach that duty by trading on confidential company information. But that framework left a gap: what about someone with no connection to the company at all, who happens to steal confidential information about it, such as a lawyer at a firm advising on a merger who isn't an insider of either company involved? The misappropriation theory, confirmed by the U.S. Supreme Court in United States v. O'Hagan (1997), closes that gap. It holds that trading on confidential information is illegal insider trading if the trader breached a duty of trust or confidence owed to the source of the information — such as an employer, a client, or anyone else who entrusted it to them — even if the trader owes no duty whatsoever to the company whose stock they traded.

This matters because it extends insider trading liability well beyond corporate insiders to outsiders like lawyers, investment bankers, consultants, or even a spouse who overhears confidential deal information and trades on it, as long as they took that information in breach of some relationship of trust. The theory's focus is the betrayal of the source's trust, not any relationship to the traded company itself.