Under the misappropriation theory of insider trading, who owes a duty not to misuse information?

• A. There is no duty related to misappropriated information in insider trading.
• B. Liability arises only if the information was publicly disclosed before trading.
• C. Only company insiders owe duties to the company when trading on information.
• D. Insiders or tippees who trade on material nonpublic information obtained through misappropriation owe duties to use information properly; liability attaches when fiduciary duty is breached.

Answer: (D)

Under the misappropriation theory, the duty not to misuse confidential information comes from the misappropriator’s breach of a fiduciary duty to the information’s source. When someone misappropriates material nonpublic information in breach of that duty, they owe a duty not to use or disclose it for personal gain. If they trade on the information or pass it on to someone else who trades, liability arises because the fiduciary duty to the source has been breached. This duty runs to the source of the information, not to the company or the public market, and it can extend to tippees who knowingly trade on the misappropriated information. That’s why the correct view is that insiders or tippees who obtain information via misappropriation owe duties to use it properly, and liability attaches when the fiduciary duty to the source is breached. The other options miss that the duty is tied to misappropriation and to the source, not merely to public disclosure, company insiders alone, or a general market duty.