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.

It is not true, as Skilling claims, that the Government’s theory at trial was that Skilling made bad business decisions; its argument was that Skilling hid those bad business decisions from investors. US Court of Appeals for the Fifth Circuit, 2011

[B]ig corporations do not lose money. John Kenneth Galbraith, 1967 Publicly held companies do not lose money. Stanley Goldblum, President of Equity Funding Corporation of America, 1969 Between the end of World War II and the start of the 1970s, regulators did not view securities fraud as a significant risk for large public companies. Major corporations often had market power in their industries and could be counted on to generate profits. They reinvested these profits in research and development and managerial training to perpetuate their advantage. They could acquire competitors or companies in unrelated industries to create new revenue streams. Investors trusted the competence of professional managers who would make wise decisions that avoided major disaster.1 Under this paradigm of managerialism, corporate managers were not as pressured by stock markets. There was thus little reason for an established public corporation to misstate its financial results. Even if it did, such a misrepresentation would be unlikely to hide serious problems that threatened a company’s solvency.

This chapter begins with a discussion of the broad concept of a market and financial markets. It then delves into the markets for shares (securities) and derivatives. Important protagonists in the financial markets are highlighted, such as the market operators (the Australian Securities Exchange or ASX), intermediaries (such as stockbrokers), investors and the largest and most powerful of corporations—listed companies. The regulation of financial markets and financial services in chs 7 and 6CA of the Corporations Act is examined, beginning with the definitions of financial products (securities and derivatives) and the type of investor (retail or wholesale).