SECURITIES LITIGATION | 2026-09-30
Insider Trading by Misappropriation: How Rule 10b5-2 Reaches Family and Personal Relationships
You can commit insider trading even if you owe no duty to the company whose stock you trade. Under the misappropriation theory and Rule 10b5-2, breaching a duty of trust — including to a spouse or family member — can be enough.
Most people think of insider trading as a corporate executive trading on their own company’s secrets. But the law reaches much further. Under the <strong>misappropriation theory</strong>, a person can be liable for insider trading by trading on <strong>confidential information</strong> in breach of
Insider trading liability does not require a relationship with the company whose stock is traded. The misappropriation theory and Rule 10b5-2 explain how far it reaches. This guide walks through the framework.
Two Theories of Insider Trading
Insider-trading liability under Section 10(b) and Rule 10b-5 rests on two theories:
- The classical theory. A corporate insider (or a tippee of one) trades in the company’s securities on material nonpublic information, breaching a duty owed to the company’s shareholders.
- The misappropriation theory. A person misappropriates confidential information in breach of a duty owed to the source of the information, and trades on it — even though they owe no duty to the company or its shareholders.
The misappropriation theory dramatically widens the net, reaching outsiders who exploit confidential information entrusted to them.
United States v. O’Hagan
The Supreme Court endorsed the misappropriation theory in United States v. O’Hagan. There, a lawyer traded on confidential information about a tender offer that his law firm was working on, breaching the duty he owed to the firm and its client — the source of the information — even though he had no relationship with the target company. The Court held that trading on information in breach of a duty of trust or confidence owed to the source is “deceptive” in connection with a securities transaction and violates Rule 10b-5. O’Hagan is the foundation of misappropriation liability.
Rule 10b5-2: When a Duty of Trust or Confidence Exists
Because misappropriation turns on breach of a duty of trust or confidence, the SEC adopted Rule 10b5-2 to provide a non-exclusive list of circumstances in which such a duty exists for purposes of the theory. Under the rule, a duty of trust or confidence generally exists:
- whenever a person agrees to maintain information in confidence;
- when the parties have a history, pattern, or practice of sharing confidences such that the recipient knew or reasonably should have known that the speaker expected confidentiality; and
- when a person receives material nonpublic information from a spouse, parent, child, or sibling — a family relationship that the rule treats as giving rise to a duty (subject to a limited defense that no duty of trust or confidence existed under the facts).
The family-relationship provision is especially important: it means that trading on confidential information learned from a close family member can create misappropriation liability.
How Family and Personal Relationships Create Liability
Consider a person who learns from their spouse — an executive at a public company — that a major, undisclosed transaction is imminent, and then trades on that information. Under Rule 10b5-2, the family relationship can supply the duty of trust or confidence, and trading in breach of that duty can constitute insider trading under the misappropriation theory. The same can apply to information shared by a parent, child, or sibling, or to friends and business associates where there is a history or pattern of sharing confidences or an agreement of confidentiality.
The Limits and the Defense
Rule 10b5-2 is not unlimited. For the family-relationship prong, the rule provides an affirmative defense where the person can show that, under the facts and circumstances of the relationship, they neither knew nor reasonably should have known that the information was expected to be kept confidential — that is, that no duty of trust or confidence actually existed. The analysis is fact-specific, focusing on the nature of the relationship and the parties’ expectations.
Why It Matters
The misappropriation theory and Rule 10b5-2 mean that insider-trading liability is not confined to corporate insiders. Anyone who trades on confidential information in breach of a duty to its source — including a family member — can face civil and criminal exposure. For individuals who receive sensitive information through personal or family relationships, the safest course is to avoid trading on it. For firms, robust information-barrier and compliance policies help prevent misappropriation exposure.
Frequently Asked Questions
What is the misappropriation theory?
A theory of insider trading where a person trades on confidential information in breach of a duty owed to the source of the information, even without a duty to the company traded.
What case established it?
United States v. O’Hagan, where a lawyer traded on confidential deal information in breach of the duty owed to his firm and its client.
What does Rule 10b5-2 do?
It sets out circumstances in which a duty of trust or confidence exists for the misappropriation theory, including agreements of confidentiality, a history of sharing confidences, and certain family relationships.
Which family relationships are covered?
The rule treats information received from a spouse, parent, child, or sibling as giving rise to a duty, subject to a fact-based defense.
Is there a defense?
Yes — for the family prong, a person may show they neither knew nor should have known the information was expected to be kept confidential.
Can I be liable if I don’t work for the company?
Yes — that is the point of misappropriation: liability can arise from breaching a duty to the source, not the company.
Related Securities & Governance Guides
Talk to a Securities Attorney About Insider Trading
If you received confidential information through a family or personal relationship, trading on it can be insider trading under Rule 10b5-2. Trembach Law Firm advises California individuals and firms. Call (818) 514-7680.
Contact Trembach Law Firm at (818) 514-7680 for a confidential consultation.
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