16 - Commentary on U.S. v. Chestman

Summary

In U.S. v. Chestman, the Second Circuit applied the misappropriation theory to insider trading. Robert Chestman, a stockbroker, received a tip from his client Keith Loeb, who was informed of material nonpublic information by his wife Susan. The misappropriation theory finds liability when a party fails to disclose the use of confidential information for trading and tipping to the party to whom a duty of confidence and trust is owed. The Chestman court used the theory but decided that Susan gave the information “gratuitously” to Keith without expectation of confidence; therefore, Chestman’s conviction could not be sustained under the misappropriation theory. Unlike this restrictive definition of fiduciary relationships, Professor Karen Woody, writing as Judge Woody in her rewritten opinion, instead finds that Keith breached a duty of confidence to Susan. As highlighted by Professor Donna Nagy in her commentary on Woody’s opinion, Susan’s choice to trust her husband was not – and should not be – an individual choice or a rebuttable presumption, but rather a fundamental feature of marriage as “definitionally a relationship of trust and confidence.” Nagy’s commentary explains the courage of augmenting spousal duties of trust and confidence, despite declining marriage rates amidst the emergence of the third wave of feminism.