In the context of insider trading, the United States Supreme Court in O'Hagan seemed to contemplate that any liability-avoiding disclosure would come before the defendant engaged in the deceptive activity. There would be no liability if the fiduciary discloses to the source that he plans to trade on the nonpublic information.
The complaint was brought by the SEC on a misappropriation theory of insider trading. It alleged that defendant Patricia B. Rocklage intentionally used deceptive means to obtain from her husband highly negative and non-public information about his publicly-traded company, in order to tip her brother who owned company stock, which then led to trading of the stock by her brother and another. Mrs. Rocklage initially concealed from her husband her prior agreement with her brother to tip him if she learned significant negative information about the company. As soon as she obtained the desired information from her husband, Mrs. Rocklage told her husband that she was going to give her brother the information. Her husband asked her not to do so, but she did so anyway, pursuant to the agreement. Under the circumstances and timing of the events, there was little her husband could do to prevent her from tipping her brother or to prevent her brother from trading on the information. Her brother sold his stock in the company on the next day the market opened and he passed the information on to a friend who did the same. The brother and his two friends are the defendant in this case who moved under to dismiss the SEC's complaint for failure to state a claim. They argued that under language Mrs. Rocklage's pre-tip disclosure to her husband, telling him that she intended to tip-off her brother, completely negated any liability under the misappropriation theory.
Whether Mrs. Rocklage's pre-tip disclosure to her husband, indicating her intent to pass the information to her brother, negated liability under the misappropriation theory.
The appellate court determined that the wife's acquisition of information was deceptive and her deceptive acquisition of material inside information was "in connection with" a securities transaction since she deceptively obtained the information as part of a preexisting scheme to assist her brother in the sale of securities. The wife's post-acquisition disclosure of her intention to tip did not render her acquisition of information nondeceptive since her overall scheme was still deceptive because of the way in which she first acquired the information. Mrs. Rocklage's preexisting arrangement with her brother can easily be understood as a "scheme" or "practice" or "course of business," whose goal was to enable her brother to trade the securities at a substantially reduced level of risk. Her deception of her husband was a natural and integral part of this scheme; she induced her husband to reveal material negative information to her about Cubist, knowing full well that in obtaining that information she would enable her brother to execute a securities transaction. She then actively facilitated a securities transaction by tipping her brother, and securities were in fact sold based on her information. These events show that her deceptive acquisition of material inside information was "in connection with" a securities transaction.