On 20 March 2017, in Securities and Exchange Commission v. Cooperman, the federal district court based in Pennsylvania denied a motion to dismiss an insider trading claim brought by the SEC against a hedge fund manager and his investment advisory firm. The court explained that this case turned on the novel issue of whether, to be liable under the "misappropriation theory" of insider trading, a trader must owe a duty of trust and confidence to the source of the misappropriated confidential information at the time the source discloses that information to the trader. The court ruled that, as long as the trader owed that duty of trust and confidence at some point before the trade in question, the trader may be liable under the misappropriation theory of insider trading.
The SEC alleged that Leon Cooperman and his firm, Omega Advisors, Inc., violated Section 10(b) of the Exchange Act by trading in advance of an announcement of a $650 million asset sale by Atlas Pipe Partners LP ("Atlas") based on confidential information that Cooperman, one of Atlas's largest shareholders, obtained directly from an Atlas executive. The SEC alleged that after the Atlas executive told Cooperman about the upcoming asset sale, Cooperman promised that he would not trade in Atlas's stock, but he proceeded to do so anyway. Under the misappropriation theory of insider trading, a corporate outsider is liable for trading in a company's securities based on material nonpublic information in breach of a duty of trust and confidence owed to the source of the information. Cooperman argued that because he allegedly promised not to trade in Atlas stock after he received the confidential information, and thus did not owe the Atlas executive a duty of trust and confidence at the time he received the information, he could not be liable under the misappropriation theory.
The court here noted that "[w]hether liability under the misappropriation theory of insider trading may be premised on a post disclosure agreement is a novel issue" that no court has "squarely addressed." The court went on to conclude that the misappropriation theory applies as long as a duty of trust and confidence arises before the outsider trades based on material nonpublic information, even if that duty did not arise until after the outsider received that information. This conclusion was based on several factors, including SEC Rule 10b5-2, which describes the circumstances that can give rise to a duty of trust and confidence; case law addressing the misappropriation theory of insider trading, which explains that the deception "occurs at the time the outsider uses material nonpublic information to trade"; the principle that liability under Section 10(b) should be construed "broadly, not technically"; and the goal of avoiding a loophole that, under Cooperman's theory, would allow corporations and outsiders to avoid liability by communicating confidential information at a time when the duty of trust and confidence did not apply.
Much attention has been focused recently on other aspects of insider trading law, such as the scope of tipper/tippee liability. This case begins to clarify another part of the relevant legal framework by addressing the underdeveloped issue of when liability attaches under the misappropriation theory of insider trading.
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