SEC Misappropriation Theory Upheld

The Securities and Exchange Commission has won a court order upholding its “misappropriation” theory in insider trading cases. The order, issued by Judge J. Curtis Joyner in Pennsylvania, denied a motion for a summary judgment by defendant Marguerite Lenfest. She and her husband, Gerry Lenfest, founder and chairman of Lenfest Communications Inc., were charged in 1995 with insider trading violations stemming from the failed takeover attempt for Tele-Communications Inc. by Bell Atlantic Corp. Gerry Lenfest was at the time a director of Liberty Media Corp., which owned 50% of Lenfest Communications and which was an affiliate of TCI. Marguerite Lenfest argued that she could not be held liable for insider trading because she was not an insider of either Liberty or TCI. Joyner rejected this, saying she may be held liable for violations of Section 10b of the 1934 Securities Act. Under the provision, it is unlawful “to employ any device, scheme or artifice to defraud.” In the SEC’s misappropriation theory, a person who trades on “material nonpublic information need not be an insider or receive the information from an insider” in order to be held liable under Section 10b.