Insider Trading Update

In an important recent insider trading case, U.S. v. Chestman, the Second Circuit Court of Appeals affirmed the misappropriation theory of insider trading liability in criminal fraud cases under Securities Exchange Act Rule 10b-5. It restricted application of the theory, however, by imposing on prosecutors the burden of proving that a defendantfailed to disclose material nonpublic information prior to a securities transaction when the defendant was under a fiduciary or like duty of trust to make such disclosure. The original Chestman court had stated that a defendant does have a duty to disclose such information, or abstain from trading in the tender offer context under Securities Exchange Act Rule 14e3(a), without regard to the existence of a fiduciary or like duty of trust.