Rule 10b5-2 Misappropriation Theory, Explained

In June 2026, the SEC and the Department of Justice filed parallel cases built on the rule 10b5-2 misappropriation theoryagainst a 27-year-old former professional soccer player from Rockaway Township, New Jersey, accusing him of making roughly $2.7 million trading ahead of eight corporate deals — mergers, acquisitions, and a couple of earnings surprises. He was never an officer, director, or employee of any of the eight companies. He never filed a Form 3, 4, or 5 in his life, because Section 16 never applied to him. What he had was access to his then-girlfriend’s work laptop.

That is misappropriation theory in action — the legal doctrine that makes insider trading illegal for people who have no connection whatsoever to the company whose stock they trade, only a relationship of trust to whoever leaked them the secret. It is the reason “insider trading” is a misleading name for a law that, in practice, does not require an insider at all.

This piece walks through where the theory comes from, what Rule 10b5-2 actually says, why a federal appeals court has never fully upheld it, and how the 2026 case against Justin Jennings shows exactly what this category of insider trading looks like — and why it is structurally invisible to any tool that only watches SEC filings.

Insider Trading Has More Than One Legal Theory

Most explainers of insider trading start and stop with the classical theory: a corporate officer, director, or major shareholder trades their own company’s stock while sitting on material nonpublic information, breaching the fiduciary duty they owe to shareholders. That is the version covered in our guide to what insider trading actually means, and it is the version Section 16 and Form 4 are built to police.

The misappropriation theory is a second, structurally different basis for liability. It does not require the trader to be a corporate insider of the company whose stock moves. It requires only that the trader breached a duty of trust or confidence to whoever gave them the information — a spouse, a friend, an employer, a romantic partner — and then traded on it. Rule 10b5-2 is the SEC rule that spells out when that duty exists. (Not to be confused with Rule 10b5-1 trading plans, which govern pre-scheduled executive trades — the numbers are one digit apart and share nothing else.)

Rule 10b5-2’s Misappropriation Theory: Trading on a Secret That Was Never Yours

The misappropriation theory traces to a single Supreme Court case: United States v. O’Hagan, 521 U.S. 642 (1997). James O’Hagan was a partner at the law firm Dorsey & Whitney. He did not work on the firm’s representation of Grand Metropolitan PLC, which was quietly planning a tender offer for Pillsbury Company. He learned about it anyway, bought Pillsbury call options and shares, and sold them for a profit exceeding $4.3 million once the tender offer was announced in October 1988.

O’Hagan owed no fiduciary duty to Pillsbury or its shareholders, so the classical theory could not reach him. The Supreme Court held that it did not need to: a person who trades for personal profit using confidential information misappropriated in breach of a fiduciary duty to the sourceof that information — here, his own law firm and its client — can still be held liable under Section 10(b) and Rule 10b-5. The Court described the conduct as “akin to embezzlement”: O’Hagan stole the secret, not the stock.

Rule 10b5-2’s Three Paths to Liability

O’Hagan established that misappropriation liability exists. It did not spell out exactly what creates a “duty of trust or confidence” outside an obvious case like a law firm and its client. That gap is what Rule 10b5-2 fills. It lays out three circumstances — and says explicitly that the list is non-exclusive, meaning a court can find a duty exists outside these three categories too.

Why the SEC Wrote This Rule the Same Day It Wrote Regulation FD

Rule 10b5-2 was not adopted on its own. The SEC issued it on August 15, 2000, in the same rulemaking release that created Regulation FD, the rule barring companies from selectively feeding material information to favored analysts and investors. Both took effect October 23, 2000. The pairing was deliberate: courts had split over what counted as a “duty” sufficient for misappropriation liability, and the SEC used one release to close the selective-disclosure loophole at the corporate level (Regulation FD) and the personal-relationship level (Rule 10b5-2).

The Rule’s Shaky Legal Foundation: SEC v. Cuban

Here is the part most explainers skip: Rule 10b5-2’s validity has never been fully settled by a federal appeals court. The clearest test came in SEC v. Mark Cuban. The SEC alleged Cuban avoided roughly $750,000 in losses by selling his entire stake in Mamma.com in June 2004, right after its CEO told him — in confidence — that the company was about to announce a discounted stock offering that would dilute existing shareholders. Cuban’s own words to the CEO, according to the complaint: “Well, now I’m screwed. I can’t sell.”

The district court dismissed the case, ruling that a bare agreement to keep information confidential is not the same as an agreement not to trade on it, and that the SEC exceeded its Section 10(b) rulemaking authority in adopting Rule 10b5-2(a)(1) to say otherwise. On appeal, the Fifth Circuit reversed on September 21, 2010, finding the complaint plausibly alleged Cuban had agreed not to trade, full stop — which meant the court did not have to reach the harder question. In its own words: “Nor must we reach the validity of Rule 10b5-2(b)(1).”

The Jennings Case: A Live Test of the Romantic-Partner Theory

Which brings us back to Justin Jennings. According to the SEC’s complaint, filed June 23, 2026 in the District of New Jersey, Jennings was in a committed relationship with an account executive at a strategic communications and investor relations firm — a company hired by public companies to help draft and manage their announcements. From February 2022 through October 2024, Jennings allegedly used her employer-issued laptop, which she often left unlocked at her apartment or his, to access a confidential internal database containing draft press releases, executive talking points, and deal strategy documents for the firm’s clients.

The complaint is explicit that the account executive never worked on any of the deals Jennings traded, never accessed the relevant documents herself, and never authorized him to use the laptop for that purpose. The SEC’s theory rests on Rule 10b5-2(a)(2): that Jennings knew, or was reckless in not knowing, that their history and pattern of sharing confidences meant she expected him not to use her work access for his own trading. Because Jennings and his girlfriend were never married, the family-member presumption in 10b5-2(a)(3) did not apply — the SEC had to build the case on the history-and-practice prong instead, which is precisely the kind of fact-intensive question SEC v. Cuban shows courts have not fully worked out.

The SEC seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties against Jennings and his trading company, Vortex Strategies LLC. Parallel to the civil case, Jennings was indicted on one count of securities fraud scheme, eight counts of securities fraud, and two counts of transacting in criminal proceeds, facing a maximum of 25 years on the scheme count alone, 20 years on each insider-trading count, and 10 years on each proceeds count.

Inside the Trades: US Ecology, Tenneco, and TravelCenters

The SEC complaint lays out all eight trades in granular detail, and the pattern is identical each time: Jennings accessed a specific draft document on the laptop days before an announcement, then bought call options (or, in one case, put options ahead of bad news) that he closed out for a large percentage gain the day the deal or disclosure went public.

TravelCenters was the outlier: roughly $10,000 in call options and a small common-stock position, closed out for $858,500 when the stock jumped 70.8% on BP’s acquisition announcement. Across all eight companies — the three above plus Infrastructure and Energy Alternatives, Myovant Sciences, Discover Financial Services, Everi Holdings, and EVgo — the complaint puts his total illicit profit at approximately $2.7 million.

Misappropriation vs. Tipper-Tippee: Two Different Doctrines

It is worth being precise about what Jennings is not accused of. Our guide to tipper-tippee insider trading covers a related but structurally different doctrine: an insider who tips someone else, who then trades. That framework requires the original tipper to have received a “personal benefit” under the Dirks and Salman line of cases before liability travels down the chain.

Jennings’s girlfriend never tipped him anything — the complaint is explicit that she did not work on the deals, did not access the relevant files, and did not know he was using her laptop for this purpose. That is what makes it a misappropriation case rather than a tipper-tippee case: Jennings took the information himself and traded on his own account, in breach of a duty he owed to her, without her participation or knowledge at all. The Supreme Court’s unanimous Salman v. United States (2016) ruling — that gifting a tip to a trading relative satisfies the personal-benefit test even with no money changing hands — answers a question tipper-tippee cases raise. It has no bearing on a case like this one, where there was never a tip to begin with.

Why This Case Will Never Show Up in a Form 4 Search

Here is the product-relevant point. Section 16 of the Securities Exchange Act requires officers, directors, and 10% ownersto file Forms 3, 4, and 5 when they trade their own company’s stock. Jennings was never an officer, director, or 10% owner of US Ecology, Tenneco, TravelCenters, or any of the other five companies named in the SEC’s complaint. He had no Section 16 filing obligation at any point during the entire scheme, because the obligation simply never attached to him.

That means any monitoring tool built purely around Form 3/4/5 data — including MarketPeel’s own insider-buying signals — would have shown nothing unusual about US Ecology, Tenneco, or TravelCenters ahead of any of these announcements. No insider bought or sold; no filing appeared. Misappropriation-theory insider trading is, by design, invisible to filing-based signals — it is caught, when it is caught at all, through options-flow anomalies, network analysis, and the kind of digital forensics the SEC used to trace Jennings’s laptop access back to specific purchase dates. That is a real limitation worth understanding if you use insider-trading data as a signal: Form 4 tells you what disclosed insiders are doing. It cannot tell you about the much larger universe of people who were never insiders at all — and who, under Rule 10b5-2, can still be charged with insider trading.