Pushing the Envelope on Insider Trading
Client Alert | 2 min read | 07.23.09
On July 22, 2009, the SEC prevailed in a cutting edge insider trading case when the United States Court of Appeals for the Second Circuit held that there is no fiduciary duty requirement for insider trading. Under this ruling, insider trading may be prosecuted under a premise that is not based on either of the two generally accepted theories of insider trading: the traditional theory or misappropriation theory. According to the Second Circuit, if deception is used to gain access to material nonpublic information, trading on the basis of that information is illegal insider trading regardless of whether a fiduciary obligation was violated. This decision illustrates the aggressive stance that the SEC is taking to combat insider trading.
In SEC v. Dorozhko, Dkt No. 08-201-cv (2nd Cir. July 22, 2009), the SEC alleged that the defendant, a Ukrainian national and resident, traded on inside information that he acquired by hacking into a secure server and downloading an earnings report prior to its disclosure. The District Court denied the SEC's request for a preliminary injunction, reasoning that since the defendant was a corporate outsider, he had no fiduciary duty to either the issuer or the owner of the secure server.
The Second Circuit concluded that neither Chiarella v. United States, 445 U.S. 22, (1980), United States v. O'Hagan, 521 U.S. 642 (1997), nor SEC v. Zandford, 535 U.S. 813 (2002), require a breach of a fiduciary duty as an element of all insider trading violations. The court added that even if an individual does not have a fiduciary duty to "disclose or abstain from trading," an affirmative obligation to not mislead still exists in commercial dealings. Since the defendant may have misrepresented himself (if his form of hacking involved a misrepresentation) to gain access to material, nonpublic information, the court believed the SEC should not be foreclosed from proceeding on this "straightforward theory of fraud." Importantly, the court adopted the "SEC's proposed interpretation of Chiarella and its progeny: 'misrepresentations are fraudulent, but . . . silence is fraudulent only if there is a duty to disclose.'" Since the alleged form of hacking was uncertain, the Second Circuit remanded the case for a determination of whether the hacking at issue involved a fraudulent misrepresentation that was deceptive, as opposed to mere theft.
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Client Alert | 3 min read | 11.21.25
On November 7, 2025, in Thornton v. National Academy of Sciences, No. 25-cv-2155, 2025 WL 3123732 (D.D.C. Nov. 7, 2025), the District Court for the District of Columbia dismissed a False Claims Act (FCA) retaliation complaint on the basis that the plaintiff’s allegations that he was fired after blowing the whistle on purported illegally discriminatory use of federal funding was not sufficient to support his FCA claim. This case appears to be one of the first filed, and subsequently dismissed, following Deputy Attorney General Todd Blanche’s announcement of the creation of the Civil Rights Fraud Initiative on May 19, 2025, which “strongly encourages” private individuals to file lawsuits under the FCA relating to purportedly discriminatory and illegal use of federal funding for diversity, equity, and inclusion (DEI) initiatives in violation of Executive Order 14173, Ending Illegal Discrimination and Restoring Merit-Based Opportunity (Jan. 21, 2025). In this case, the court dismissed the FCA retaliation claim and rejected the argument that an organization could violate the FCA merely by “engaging in discriminatory conduct while conducting a federally funded study.” The analysis in Thornton could be a sign of how forthcoming arguments of retaliation based on reporting allegedly fraudulent DEI activity will be analyzed in the future.
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