What is the "misappropriation theory" of insider trading, and how does it relate to the regulation of insider trading?

The misappropriation theory of insider trading is a legal concept that expands the definition of insider trading beyond the traditional concept of trading based on material non-public information obtained from the company. The theory was first articulated by the US Supreme Court in the 1997 case of United States v. O'Hagan.

Under the misappropriation theory, a person can be found guilty of insider trading even if they do not have a direct relationship with the company whose securities are traded. This can occur when a person obtains confidential information from someone who owes a duty of trust or confidence to the company, such as a lawyer, accountant, or consultant. If that person trades on the information or tips others who trade on the information, they can be held liable for insider trading.

The misappropriation theory was developed to address situations where a person outside a company obtains confidential information that can be used for insider trading. The theory is designed to protect the integrity of the markets by preventing individuals from using confidential information for personal gain at the expense of others.

The regulation of insider trading under the misappropriation theory is enforced by the Securities and Exchange Commission (SEC) and other regulatory bodies. In addition, companies are required to have policies and procedures in place to prevent insider trading and to educate employees and other parties about the legal and ethical implications of insider trading.

Overall, the misappropriation theory has played an important role in expanding the scope of insider trading regulations to cover a broader range of actors and circumstances, thereby promoting fair and transparent markets.