Securities Law—First Circuit Limits Scope of “Safe Harbor” Disclosure Loophole Under Misappropriation Theory of Insider Trading—SEC v. Rocklage, 470 F.3d 1 (1st Cir. 2006)

First Circuit Review 2008

In Oliver Stone’s film Wall Street, Gordon Gekko’s philosophy that “greed is good” exposed the widespread corporate culture of excess and ruthlessness that defined the 1980s.  Decades before this era, Congress and the Securities and Exchange Commission (SEC) enacted § 10(b) of the 1934 Securities and Exchange Act (‘34 Act) and Rule 10b-5 to limit the impact of greed in corporate America.  Despite Congress, the SEC, and the Supreme Court’s regulatory frameworks, what constitutes insider trading, especially misappropriation-based insider trading, remains unclear.  Despite this ambiguity, the scope of insider trading prohibition has narrowed with time.  In SEC v. Rocklage, the United States Court of Appeals for the First Circuit clarified what constitutes misappropriation-based insider trading by considering whether a pre-tip disclosure eliminated liability where an alleged misappropriator deceptively acquired information.  The court affirmed the district court’s denial of the defendant’s motion to dismiss for failure to state a claim and remanded the SEC’s § 10(b) claim, explaining that a pre-tip disclosure does not always render the acquisition of information non-deceptive and eliminate liability, thus limiting the scope of the “safe harbor” loophole for misappropriation-based insider trading. . . .