In U.S. v. O'Hagan, 521 U.S. 642 (1997), the United States Supreme Court held that that a person who misappropriates material nonpublic information from the source of the information may be guilty of insider trading even though he or she did not owe any duty to the persons with whom he traded. For misappropriation to occur there must be some obligation not to use the information. Without some obligation, the misappropriation theory of insider trading falls apart. Thus, the question is from whence does such a duty arise?
In the eyes of the Securities and Exchange Commission, a long-time friendship may be sufficient. Yesterday, the SEC announced that it had filed and settled a civil insider trading action against an individual who, while a guest in the home of his long-time friend, secretly viewed material, nonpublic information regarding a merger. According to the SEC's complaint, the friend used this information, without telling his host, to buy shares in the target "in breach of his duty of trust and confidence to his long-time friend".
The SEC's allegations illustrate how the misappropriation theory of insider trading has become completely unmoored from the purposes of the securities laws. Congress did not enact Section 10(b) with a view to protecting guest-host relations. It is absurd that innocence and guilt turns on whether the guest and the host met in middle school or were only recently introduced.