Misappropriation Theory

What Is Misappropriation Theory?

Misappropriation theory proposes that a person who involves insider data in trading securities has committed securities fraud against the data source. In the United States, a person who is liable as per the misappropriation theory might be sentenced for insider trading.

However not explicitly forbidden by U.S. securities laws, insider trading is considered to fall under the denial against misleading trading rehearses and is in this manner illegal while committed utilizing material nonpublic information.

Figuring out Misappropriation Theory

Misappropriation theory varies from the classical theory of insider trading. The classical theory targets a corporate insider's breach of duty to shareholders with whom the insider executes. The insider might be an employee, director, or officer of the company.

Then again, misappropriation theory outlaws trading by a corporate untouchable who gets nonpublic data. At the point when an outcast gets classified or insider data about a company and uses the data to trade, misappropriation has happened. The outcast has deceived the trust of the source, doubtlessly a corporate insider.

Illustration of Misappropriation Theory

Misappropriation theory acquired unmistakable quality in the Supreme Court's conviction of James H. O'Hagan. An attorney, O'Hagan followed up on insider data in regards to a takeover bid for the Pillsbury Corporation. The United States versus O'Hagan was a watershed case for the theory.

Misappropriation theory applied to the insider trading case of Carl Reiter, a real estate designer during the 1980s. While playing golf with friends, Reiter was encouraged to buy stock in the pharmacy chain, Revco Drug Stores. The companion gave inside information on an impending merger that would be profitable for investors. Reiter heeded his companion's guidance, bought the stock, and gathered a profit of $2,625 by selling his shares when the companion's tip proved right.

Minus any additional contribution in the Revco company, Reiter was uninformed that he had taken part in illegal insider trading. After two years, Reiter and his kindred friends, who utilized the nonpublic data, were all accused of insider trading under the misappropriation theory. They had received data from somebody who unveiled nonpublic data. Reiter was required to discharge his profits from the illegal investment and was fined by the Securities and Exchange Commission (SEC).

Features

• Misappropriation theory is planned to safeguard securities markets to keep them fair and efficient.
• Misappropriation theory is the legal principle behind indicting those blameworthy for insider trading.
• Misappropriation theory outlaws trading in view of nonpublic data received and utilized by a corporate pariah.