The law is pretty clear today; persons within a public company cannot trade on material inside information, and their tippees cannot either, in virtually all cases. But what about someone who does not fall in one of those categories, who may appear shall we say “less than clean-handed,” but does not seem to owe any duty to, or have any relationship with, the company or its shareholders, nor the counter-party to the trades, nor the original source of the inside information itself.

A person convicted of deceptive trading as a criminal offense has petitioned the US Supreme Court to consider overturning his conviction; his conviction was confirmed by the Second Circuit Court of Appeals based on theories of conspiracy to commit securities fraud, computer intrusions, and securities fraud. The prosecution alleged appellants owed a duty to the trading public when they earned about $18M on their trades, but those trades were through exchanges and without dealing with the counterparties and the information was originally hacked by persons not known to the defendants.

Although the appeal addresses only the securities fraud convictions (seemingly it is clear that defendants re-hacked), the appeal does raise the issue that, by extension, the court reasoning could support a conviction in virtually every case where someone obtains inside information by virtually any means, however removed that person is from the company, tippees, buyers, sellers, anyone.

Do outsiders owe a floating duty to “the integrity of the marketplace”?  This is not a direction alien to past arguments by the SEC.  Where is the line?  Will the Supreme Court exercise discretion to hear this case?  Was the activity here so bad on its own that it supports a securities law conviction?