Outsider Hacking and Insider Trading: The Expansion of Liability Absent a Fiduciary Duty

In January 2008, the United States District Court for the Southern District of New York held that trading put options of a company’s stock based on inside information allegedly obtained by hacking into a computer network did not violate antifraud provisions of federal securities law. The court ruled that the defendant’s alleged “hacking and trading” did not amount to a violation of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, promulgated thereunder, because there was no proof the hacker breached a fiduciary duty in obtaining the information. The United States Court of Appeals for the Second Circuit overturned the District Court’s decision, finding that a breach of fiduciary duty was not required for computer hacking to be “deceptive.” This article evaluates the Second Circuit’s decision in S.E.C. v. Dorozhko in light of the assumption that liability under the misappropriation theory requires a breach of fiduciary duty. This article also explores how the Second Circuit’s decision may potentially expand section 10(b) liability to a wider range of parties who take advantage of access to material nonpublic information by trading securities based on that information