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52 Alb. L. Rev. 775 (1987-1988)
The Jurisprudence of the Misappropriation Theory and the New Insider Trading Legislation: From Fairness to Efficiency and Back

handle is hein.journals/albany52 and id is 783 raw text is: THE JURISPRUDENCE OF THE MISAPPROPRIATION
Lawrence E. Mitchell*
Many forests have been destroyed in the quest to understand and
explain the law of insider trading. A substantial portion of this acreage,
at least since 1980, has been devoted to attempts to make sense of
the misappropriation theory which, in its essence, holds that one who
misappropriates- [steals] to put it bluntly '-nonpublic material
information, and then trades in the securities to which it relates, has
committed a violation of section 10(b) of the Securities Exchange
Act of 1934 and its effectuating rule, rule 10b-5.2 These essays generally
have focused on policy considerations and practical concerns under-
lying the insider trading proscription.3 Although these concerns are
* Assistant Professor, Albany Law School of Union University; B.A., Williams College; J.D.,
Columbia University School of Law. I would like to thank my research assistants, Laurie Marsh
and Patti Murphy, for their help in completing this Article under a tight deadline. I would
also like to thank my colleagues Dan Moriarty and Mary Helen Moses for their supportive
reading of an earlier draft of this Article. I would especially like to thank Bob Emery, Assistant
Director of the Schaffer Law Library of Albany Law School, and the Executive Board of the
Albany Law Review, particularly David DiBari, Jeff Rosenberg and Mary Walsh, for their helpful
input and insight. I take the customary blame for my errors.
' The familiar phrase comes from former Chief Justice Burger's dissent in Chiarella v. United
States, 445 U.S. 222, 245 (1980) (Burger, C.J., dissenting).
2 The misappropriation theory was developed by the Securities and Exchange Commission
(SEC) and the Second Circuit as an interpretation of section 10(b) of the Securities Exchange
Act of 1934 (codified as amended at 15 U.S.C. § 78(b) (1982)) and rule 10b-5 promulgated
thereunder, 17 C.F.R. § 240.10b-5 (1988), as a means of complying with the Supreme Court's
theory of insider trading developed in Chiarella, 445 U.S. 222, discussed infra at notes 243-74
and accompanying text, while continuing to expand the scope of the insider trading proscription.
See Phillips & Zutz, The Insider Trading Doctrine: A Need for Legislative Repair, 13 HOFSTRA
L. REV. 65, 86-93 (1984). Briefly, the misappropriation theory holds that one who obtains
material, nonpublic information in the course of a confidential relationship with another may
not trade in the securities to which that information relates without publicly disclosing that
information. For development and application of the theory, see SEC v. Materia, 745 F.2d 197
(2d Cir. 1984), cert. denied, 471 U.S. 1053 (1985); United States v. Newman, 664 F.2d 12 (2d
Cir. 1981), judgment aff'd after remand, 722 F.2d 729 (2d Cir.), cert. denied, 464 U.S. 863 (1983).
On the question of what constitutes public disclosure, see Dirks v. SEC, 463 U.S. 646, 653 n.12
(1983); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976
3 For discussions of the policy rationales for and against the prohibition of insider trading,
see H. MANNE, INSIDER TRADING AND THE STOCK MARKET (1966); Bainbridge, The Insider
Trading Prohibition: A Legal and Economic Enigma, 38 U. FLA. L. REV. 35 (1986); Brudney,
Insiders, Outsiders, and Informational Advantages Under the Federal Securities Laws, 93 HARV.
L. REV. 322 (1979); Carlton & Fischel, The Regulation of Insider Trading, 35 STAN. L. REV.

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