MBE Rules · Business Associations
Insider Trading Theories
Classical vs. misappropriation
The rule
Classical liability reaches insiders and tippees trading their own company's shares; misappropriation reaches outsiders trading on confidences taken in breach of a duty to the source; tippee liability requires the tipper's personal benefit and the tippee's knowledge.
In plain English
Insider trading laws prohibit individuals with non-public information about a company from trading its stock based on that information. There are two main theories: the classical theory applies to company insiders and their tippees, while the misappropriation theory applies to outsiders who breach a duty to the source of the information.
Worked example
A corporate executive learns that their company is about to be acquired and buys shares before the public announcement. They also tell a friend, who then buys shares based on this information. Both the executive and the friend could be liable for insider trading under the classical theory.
Memory hook
Insiders and tippees can't trade on secrets; outsiders can't steal them!
The trap
Exams may present scenarios where the source of the information is ambiguous, leading students to misidentify the applicable theory of insider trading. Students might confuse the requirements for tippee liability with those for classical liability.
How examiners test it
Questions often involve fact patterns where individuals trade based on confidential information, requiring students to identify whether the classical or misappropriation theory applies and to analyze the roles of insiders, tippees, and the source of the information.
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