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Second Circuit Endorses SECs Expansive View of Insider Trading

July 30, 2009

By Kenneth M. Breen, Douglas Koff, Keith W. Miller, Barry G. Sher, Sean T. Haran, and Michael M. Bruso

Recently, the U.S. Securities and Exchange Commission (the SEC) has sought to expand the scope of insider trading liability. Last weeks Second Circuit decision in SEC v. Dorozhko appears to have advanced that goal by eliminating the need to prove a key element in insider trading cases involving affirmative misrepresentations. Specifically, the Dorozhko Court ruled that a computer hacker can be liable for insider trading even if he did not violate any fiduciary duty in obtaining the material, non-public information upon which he traded. At least in the Second Circuit, this decision alters the insider trading jurisprudence regarding duty that has developed over the last thirty years. Although the decision does not impact insider trading cases involving omissions rather than affirmative misrepresentations, it will likely embolden the SEC in its efforts to further extend the reach of insider trading law.