Who's Suing Who? A Commentary on Investment Bankers and the Misappropriation Theory

Abstract:     
Insider trading has permeated the investment banking industry, moving beyond the traditional insider trading context. The new environment consists of outsiders, investment bankers, and their employees, who breach their client’s confidences when they misappropriate nonpublic information for personal financial gain. Addressing the concerns of the corporate client whose confidences have been betrayed by its investment banker, this commentary looks to the underlying question: whether that client has a private cause of action for securities fraud under the SEC’s rule 10b-5 for any damages sustained. To establish a factual predicate for the analysis, this article utilizes a recent complaint filed in federal court. It then sets forth various preliminary observations that amplify the factual predicate. Several of the obstacles presented by the limitations on the scope of rule 10b-5 and the prerequisites for a private cause of action are considered. The article concludes that legislative reform is vital to provide private litigants with effective recourse under the federal securities laws for damages based on misappropriation of nonpublic information.

Number of Pages in PDF File: 27

Keywords: investment bankers, misappropriation theory, insider trading, securities, securities regulation, breach of duty, Rule 10b-5, Securities Exchange Commission, legislative reform, nonpublic information

JEL Classification: G2, G24, G28, K2, K20, K22

Accepted Paper Series