Securities Law - First Circuit Limits Scope of "Safe Harbor" Disclosure Loophole under Misappropriation Theory of Insider Trading

By Manning, Matthew R. | Suffolk University Law Review, Spring 2008 | Go to article overview

Securities Law - First Circuit Limits Scope of "Safe Harbor" Disclosure Loophole under Misappropriation Theory of Insider Trading


Manning, Matthew R., Suffolk University Law Review


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)

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. (1) Decades before this era, Congress and the Securities and Exchange Commission (SEC) enacted [section] 10(b) of the 1934 Securities and Exchange Act ('34 Act) (2) and Rule 10b-5 (3) to limit the impact of greed in corporate America. (4) Despite Congress, the SEC, and the Supreme Court's regulatory frameworks, what constitutes insider trading, especially misappropriation-based insider trading, remains unclear. (5) Despite this ambiguity, the scope of insider trading prohibition has narrowed with time. (6) In SEC v. Rocklage, (7) 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. (8) 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 [section] 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. (9)

On December 31, 2001, Mr. Rocklage, the Chairman and Chief Executive Officer (CEO) of Cubist Pharmaceuticals (Cubist) relayed private and material information to his wife. (10) He told her that one of Cubist's key drugs failed a clinical trial and that the company's stock price would drop upon public announcement of such news. (11) Mr. and Mrs. Rocklage had a mutual agreement to keep this information confidential, but Mrs. Rocklage also had a preexisting agreement to relay any negative news about Cubist to her brother, William M. Beaver (Beaver). (12) Shortly thereafter, Mrs. Rocklage told her husband that she intended to tip Beaver to sell his shares of Cubist stock. (13) Despite Mr. Rocklage's insistence that information regarding the clinical trial remain confidential, Mrs. Rocklage gave her brother a "wink and a nod," their prearranged indicator, signaling negative news about Cubist. (14) On January 2, 2002, Beaver sold all of his Cubist stock and also prompted his neighbor, David G. Jones (Jones), to do the same. (15)

Three years later, the SEC filed a civil complaint against Mrs. Rocklage, Beaver, and Jones in the United States District Court for the District of Massachusetts alleging [section] 10(b) and Rule 10b-5 violations under a misappropriation-based theory of insider trading. (16) The three defendants filed a Rule 12(b)(6) motion to dismiss for failure to state a claim, arguing that, pursuant to the Supreme Court's disclosure loophole in United States v. O'Hagan, (17) Mrs. Rocklage's pre-tip disclosure to her husband negated all liability under a misappropriation-based insider trading theory. (18) The district court held that although the defendants were not liable based on a classical theory of insider trading, because Mrs. Rocklage was not an insider of Cubist, they were, however, liable under a misappropriation theory, despite O'Hagan's disclosure loophole. (19) The defendants then moved for the district court to reconsider, arguing the district court misread O'Hagan; but the district court denied the motion despite its concession that it misapplied O'Hagan. (20) In the alternative, the defendants requested that the district court certify the issue for an interlocutory appeal, which the district court did after denying the defendant's motion for reconsideration. (21) The United States Court of Appeals for the First Circuit accepted the appeal and held that Mrs. Rocklage deceptively acquired nonpublic information from her husband and that her pre-tip disclosure to her husband did not preclude liability under a misappropriate-based insider trading theory.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Securities Law - First Circuit Limits Scope of "Safe Harbor" Disclosure Loophole under Misappropriation Theory of Insider Trading
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.