CA1: little misappropriation theory of insider trading

SEC v. Rocklage, No. 06-1571 (11/14/06).  Although many women are advised by their parents to “marry rich,” few are advised of the pitfalls of telling their brothers inside information about their husband’s company.  Their parents probably tell them that they can avoid liability by telling their husbands that they intend to disclose the information to their brothers, who will, in turn disclose the information to the “downstream tipees.”

Tell everyone a Santorum joke, and keep reading.

Anyway, the SEC brings a civil suit under Sec. 10(b).  The defendants move to dismiss, arguing that United States v. O'Hagan, 521 U.S. 642 (1997), limits liability under the “‘misappropriation theory’” of insider trading.  The SEC and the First work hard to distinguish it, and succeed.  The First concludes that the SEC has done enough in the complaint to survive a motion to dismiss, because it alleged

It concludes that the defendants were alledged to have used a “deceptive device” by taking advantage of her husband’s understanding that she wouldn’t disclose the things she told them.  And therefore, “Her deception of her husband was a natural and integral part of this scheme; she induced her husband to reveal material negative information to her about Cubist, knowing full well that in obtaining that information she would enable her brother to execute a securities transaction.”  Get it.  The SEC is alleging that she deceived her husband.

Finally, the First addresses the issue of what sort of disclosure will make such a scheme non-deceptive.  Well, they don’t really address it, except to say that the Supreme Court has not addressed it.  They conclude:

Until the Supreme Court has clarified its language about disclosure, this uncertainty is an important factor in why we are unwilling to state generalized rules. Our task is to decide cases on an individual basis, and it suffices for us to say that on the facts asserted in the complaint, the SEC has stated a claim.

Of course, this probably doesn’t apply to criminal matters where broad pronouncements on such matters of import are the norm.  Likewise, the First’s declaration that Even dicta inSupreme Court opinions is looked on with great deference. See United States v. Santana, 6 F.3d 1, 9 (1st Cir. 1993), obviously does not apply to criminal matters involving poor people. 

So the moral is clear, parents: when telling your daughters to marry rich, be sure to explain how United States v. O'Hagan, 521 U.S. 642 (1997), is not as broad as previously thought in the third circuit.  Also, husbands, when you marry a girl with a stock-holding brother, don’t tell them anything.  DoTD comments here.