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.

Had Xerox reported its revenues and earnings consistent with its accounting in earlier years, Xerox would have failed to meet Wall Street earnings-per-share expectations in 11 of 12 quarters in 1997–1999. Securities and Exchange Commission, 2002 While it did not receive the same attention as the cases arising out of the Enron and WorldCom frauds, the Securities and Exchange Commission’s (SEC) enforcement action against Xerox was significant because it was the first where the agency imposed a significant penalty on a corporate defendant for misleading investors about its financial results. The case was part of a concerted effort beginning in the latter half of the 1990s to address misstatements by public companies to meet market projections of quarterly earnings. Because many of the issues raised in public company securities fraud cases were present in the Xerox case, it provides an ideal introduction to the subject of securities fraud.

This case presents the grimly familiar picture of disappointed investors crying fraud after fortunes were lost when a promising corporation stumbled. US District Court for the District of Massachusetts, 1993 In the Xerox and Penn Central cases, public companies misstated their financial statements to support false narratives of their ability to continue generating profits. Companies also shape investor perceptions of their future performance through disclosures about their businesses, particularly with respect to important products. Just as the conglomerates of the 1970s sought to satisfy market expectations by reporting earnings increases, the computer companies of the 1980s faced pressure to successfully complete the development of new technologies. Investors were willing to pay more for a stock to take into account the possibility that a promising product would be widely embraced by consumers. However, if there was a significant setback, they could lose faith and flee the stock. Computer company stocks were thus more volatile than the stocks of companies in traditional industries.1