Persons receiving inside information may be liable for securities fraud even if they are not corporate insiders and owe no direct duty to the source of the information. This theory of liability is known as the misappropriation theory, and its application to individuals who receive material, nonpublic information (commonly referred to as “tippees”) was recently ad-dressed by the Second Circuit.
In SEC v. Obus, the Second Circuit broadly interpreted the standard for tip-per and tippee liability in Section 10(b) and Rule 10b-5 insider trading actions brought under the misappropriation theory, ruling that a tippee may be liable for insider trading violations if he knew, or should have known, that the tipper breached a duty to his employer in dis-closing the information. SEC v. Obus, 693 F.3d 276 (2d. Cir. Sept. 6, 2012). In so ruling, the Second Circuit reasoned that the misappropriation theory targets persons who are not corporate insiders but who have received material nonpublic information in confidence, and who breach a duty to the source of the information to gain personal profit.
While liability will attach only if someone knows, or should have known, that the tipper is breaching a fiduciary duty, the Obus case indicates that knowledge of a breach may be inferred by circumstantial evidence. Further, the Second Circuit’s opinion suggests that sophisticated tip-pees may be presumed to know that a tipper has breached a fiduciary duty as a result of the tipper’s disclosure of information.