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The SEC has a legal weapon that allows the regulator to go after individuals who are not technically corporate insiders but nevertheless traded on information they were not supposed to possess. This is what lawyers refer to as the misappropriation theory, and the S.E.C. has been employing it with greater force in recent years to trap schemes that might have escaped through older insider trading rules.
Here’s how that theory goes — if someone violates a duty of trust to obtain confidential information and uses the inside scoop in connection with trading, that’s securities fraud as prohibited by Rule 10b-5. Even if they never worked for the company whose stock they traded. What counts is they lied to whoever the information was obtained from in the first place.
In FY2024 the SEC brought 35 standalone insider trading cases and data released with respect to FY2025 indicates that insider trading and offering fraud collectively represented around a third of all enforcement actions. The numbers explain why the S.E.C. is taking this seriously and its recent penalties demonstrate that it means business, too.
Classical Theory vs Misappropriation: What’s the Difference
Traditional insider trading rules were built around corporate insiders—executives, board members, people who worked for the company and traded on secrets they learned through their jobs. The problem was this left a gap. What about the lawyer whose firm represents the company? The consultant who reviews merger documents? The banker working on a deal?
These people aren’t corporate insiders but they get access to the same confidential information. Under classical theory, catching them was difficult because they didn’t owe duties to the company’s shareholders in the traditional sense.
Misappropriation theory fills that gap by focusing on a different relationship—the duty to whoever provided the information.
| Aspect | Classical Theory | Misappropriation Theory |
|---|---|---|
| Who it targets | Corporate insiders (officers, directors, employees) | Outsiders who breach trust to source of information |
| Duty owed to | Company shareholders | The information source (employer, client, business partner) |
| What makes it fraud | Breach of duty to shareholders when trading | Deceiving the information source through nondisclosure |
| Legal basis | Rule 10b-5 | Rule 10b-5 (affirmed in O’Hagan) |
Both theories operate under Rule 10b-5, but they catch different kinds of wrongdoing. Classical theory is about insiders betraying shareholders. Misappropriation is about outsiders betraying whoever trusted them with confidential information.
The O’Hagan Case That Made This Possible
United States v. O’Hagan from 1997 is where the Supreme Court said yes, misappropriation theory is valid under securities law. Before this ruling, circuit courts were split on whether the theory even worked, and that uncertainty made enforcement inconsistent.
James O’Hagan was a partner at the law firm Dorsey & Whitney. His firm was representing Grand Met on a confidential tender offer to acquire Pillsbury. O’Hagan wasn’t working on that matter directly, but he learned about it through the firm and started buying Pillsbury call options and shares without telling anyone.
When Grand Met announced the tender offer publicly, Pillsbury stock jumped and O’Hagan made over $4.3 million in profits.
What the Court decided
Justice Ginsburg wrote the majority opinion and the reasoning was straightforward—O’Hagan deceived his law firm and its client by pretending to keep their secrets while actually using them for personal gain. That deception in connection with securities trading satisfies the fraud requirement under Section 10(b) and Rule 10b-5.
The Court made an important point about disclosure. If O’Hagan had told his firm he planned to trade on the information, the deception element would be gone. He might face other consequences for breaching confidentiality, but it wouldn’t be securities fraud in the same way. The fraud comes from the lying, not just the trading.
This ruling gave SEC authority to pursue anyone who misuses confidential information through deception, regardless of whether they’re a corporate insider.
Recent SEC Enforcement Cases (2022-2025)
The theory isn’t sitting in law books collecting dust. SEC has been actively using it, and some recent cases show how they’re applying it to situations that push the boundaries of traditional insider trading concepts.
SEC v. Matthew Panuwat — Shadow Trading (2024)
This case got attention because it was the first jury verdict upholding what’s called shadow trading under misappropriation theory.
Panuwat worked as an executive at Medivation, a pharmaceutical company. In 2016, he learned through his job that Pfizer was about to acquire Medivation. Instead of trading Medivation stock (which would be obvious insider trading), he bought call options in Incyte Corporation—a different company that competed in the same space.
His thinking was apparently that when Pfizer’s acquisition of Medivation went public, it would make other similar pharmaceutical companies look attractive as acquisition targets too, and Incyte stock would rise. He was right and made about $107,000.
The SEC argued this was misappropriation because Panuwat breached his duty to Medivation by using their confidential information to trade, even though he traded a different company’s stock. The jury agreed in April 2024.
Penalty: $321,197 total (roughly triple his profits)
SEC v. Andreas Bechtolsheim — Shadow Trading (2024)
Bechtolsheim was chairman of Arista Networks. In December 2021, he learned from a business contact about Cisco’s confidential plans to acquire Acacia Communications. Acacia wasn’t his company and neither was Cisco—he got the information through a personal business relationship.
He directed relatives and an associate to buy Acacia stock before the announcement. When Cisco’s acquisition went public, Acacia stock rose 35% and the trades generated $415,726 in profits.
Penalty: Settled in March 2024 for approximately $923,740 total (disgorgement plus interest plus penalty), along with a 5-year bar from serving as officer or director of a public company. He didn’t admit guilt.
SEC v. Eamma Safi & Zhi “Josh” Ge — International Scheme (2025)
This case shows the SEC going after cross-border schemes. Safi is German, Ge is Singaporean, and between 2017 and 2024 they allegedly ran a scheme trading ahead of over 20 merger and acquisition announcements.
According to SEC charges filed in March 2025, they got tips through various channels (one example mentioned was lunch meetings in Paris) and traded on U.S. securities, generating $17.5 million in illicit profits.
Status: Charges ongoing under Rule 10b-5, with a possible parallel DOJ criminal investigation.
SEC v. Ryan Squillante — Secondary Offerings (2025)
Squillante was head of equity trading at Irving Investors, a Denver-based firm, from 2021 to 2023. He had access to confidential information about upcoming secondary offerings for various companies—when companies issue more stock, it often pushes the price down temporarily.
He allegedly misused this information to short-sell stock in at least 11 instances between August 2022 and May 2023, making somewhere between $216,965 and $220,000 in profits across trades involving more than 10 different companies.
Outcome: Settled with SEC in September 2025 without admitting guilt (civil penalty amount to be determined by court). Separately, he pleaded guilty to securities fraud in criminal court in June 2025.
U.S. v. Terren Peizer — 10b5-1 Plan Misuse (Criminal, 2024-2025)
This one is notable because it’s the first criminal case built solely around misuse of Rule 10b5-1 trading plans. These plans are supposed to let executives set up automatic trades in advance so they can sell stock without worrying about what information they have at the time of sale.
Peizer was CEO of a behavioral healthcare company. Prosecutors alleged he set up 10b5-1 plans while knowing material nonpublic information about the company, which defeats the whole purpose of those plans.
Outcome: Convicted in 2024, sentenced in 2025 to 42 months in prison, $5.25 million fine, and $12.7 million forfeiture.
Penalty Breakdown in Recent Cases
The penalties in these cases give you a sense of what defendants face when SEC brings misappropriation charges.
| Case | Year | Profits | Total Penalty | Other Consequences |
|---|---|---|---|---|
| Matthew Panuwat | 2024 | $107,066 | $321,197 | Jury verdict (no settlement) |
| Andreas Bechtolsheim | 2024 | $415,726 | ~$923,740 | 5-year officer/director bar |
| Terren Peizer | 2024-25 | N/A | $5.25M fine + $12.7M forfeiture | 42 months prison |
| Ryan Squillante | 2025 | ~$220,000 | TBD by court | Criminal guilty plea |
| Safi & Ge | 2025 | $17.5M | Ongoing | Possible DOJ charges |
The pattern you see is penalties often running to triple the profits made, plus the possibility of being barred from serving as an officer or director. Criminal cases add prison time on top of that.
How Courts Have Refined the Theory
Since O’Hagan, courts have been working out the details of how misappropriation theory applies in different situations. Not every breach of confidence counts as securities fraud, and courts have had to draw lines.
The Second Circuit has provided important court guidance on insider trading through several decisions over the years. Their rulings have helped clarify questions like when temporary insiders such as consultants owe duties to companies, what kind of relationship creates a duty of confidentiality, and what counts as deception under the theory.
Questions courts have addressed
- Family relationships: Can you share confidential information with a spouse or family member? Courts have looked at whether there was an expectation of confidentiality and whether trust was broken. The SEC has brought cases against family members who traded on tips, with mixed results depending on the specific facts.
- Business relationships: The Bechtolsheim case shows how duties can arise from informal business contacts, not just formal employment or consulting relationships. If someone shares confidential information with you in a business context and you trade on it without telling them, that can trigger liability.
- What counts as “confidential”: Information has to be material and nonpublic, but courts also look at whether the defendant knew or should have known the information was supposed to stay confidential. An analyst who figures something out from public data doesn’t violate the law. Someone who gets tipped off at a lunch meeting and knows they’re hearing something they shouldn’t—that’s different.
- Shadow trading boundaries: Panuwat pushed the theory into new territory by trading a different company’s stock. Courts are still working out where the limits are. Does any trade based on confidential information count, or does there have to be some closer connection between the information and the security traded?
Why Enforcement Matters for Markets
The point of all this enforcement activity isn’t just to punish individual wrongdoers. It’s about maintaining a system where regular investors feel safe participating in markets.
When people believe the game is rigged—that insiders and their friends are trading on information nobody else has access to—they pull back from investing. That hurts capital formation and makes markets less efficient. The SEC’s enforcement of misappropriation theory is meant to signal that cheating has consequences, even for people who think they’ve found clever workarounds to traditional insider trading rules.
The deterrent effect matters as much as the individual penalties. Lawyers, consultants, bankers, and others who handle confidential information know that trading on it isn’t a safe bet even if they’re not technically corporate insiders. That knowledge keeps more people honest.
Balance with legitimate activity
Not every use of information is illegal. Analysts are supposed to research companies. Journalists investigate stories. Investors make decisions based on what they learn. The law tries to separate legitimate information gathering from fraud.
The key factors are deception and breach of duty. Did someone lie or break trust to get the information? Did they trade while hiding what they were doing from the person who trusted them? Those elements distinguish misappropriation from legal trading activity.
What Recent Trends Tell Us
A few patterns emerge from a second look at following year (FY) 2024 and FY 2025 enforcement.
- Shadow trading is here to stay: With Panuwat, the SEC has a jury-tested theory for sweeping up people who trade related securities rather than the company whose information they misappropriated. Expect more of these cases.
- International cooperation on the rise: SEC’s action in Safi & Ge is an example of work it is doing to pursue cross-border schemes that would have been tougher to bring years ago. Knowledge and capital are global, and enforcement is not far behind.
- Criminal prosecution is serious: The Peizer case at 42 months sounds the note that DOJ will bring criminal actions for misappropriation-type conduct—not merely leaving it to SEC civil enforcement.
- 10b5-1 plans aren’t safe harbors for wrongdoers: The Peizer case has singled out misuse of these plans, which some executives may have thought put them in the clear. That assumption is now plainly mistaken.
- Politicians are also relatively shielded despite scrutiny: The STOCK Act of 2012 includes disclosure requirements but pretty weak penalties ($200 fines) and the SECstill hadn’t brought any cases against members of Congress as of early 2026. Multiple bills to restrict congressional stock trading have gone nowhere.
References
- United States v. O’Hagan, 521 U.S. 642 (1997): https://supreme.justia.com/cases/federal/us/521/642/
- SEC Rule 10b-5 (17 CFR § 240.10b-5): https://www.law.cornell.edu/cfr/text/17/240.10b-5
- SEC v. Panuwat litigation documents: https://www.sec.gov/litigation/litreleases/2021/lr25209.htm
- SEC FY2024 Enforcement Results: https://www.sec.gov/news/press-release/2024-186
- SEC v. Bechtolsheim settlement: https://www.sec.gov/litigation/litreleases/2024/lr25953.htm
- SEC v. Safi and Ge charges: https://www.sec.gov/litigation/litreleases/2025/lr26000.htm
- U.S. v. Peizer criminal case: DOJ Press Release, 2025
- SEC Insider Trading Policy Disclosure Rules (Item 408): https://www.sec.gov/rules/final/2022/33-11138.pdf
