What is Misappropriation Theory?

The misappropriation theory is a theory that states that if an individual leverages their knowledge of insider information or classified information of a company during trade, such an individual has committed fraud. The misappropriation theory is often used in the securities and exchange market to describe an activity in which a trader commits securities fraud by using insider information in a trade. 

In certain scenarios, some traders have access to classified or confidential information of companies whose securities they are trading, according to the ethics of trade, such information should not be used for personal benefits. When such traders use classified information for personal benefits during securities trade, misappropriation has occurred.

How Misappropriation Theory Works

Misappropriation refers to an act of using access to insider information in a wrongful manner, especially during securities trade. Oftentimes, misappropriation theory is mistaken for insider trading but these are two different concepts. Insider trading is a classical theory in which if a company insider uses inside information of the company when engaged in trade, especially for personal benefits is guilty of insider trading. 

In misappropriation theory, on the other hand, the individual is not an insider but uses access to non-public information about the company for securities trade, thereby committing fraud. When an outsider who comes across classified or insider information about a company uses the information when trading, misappropriation has occurred. Usually, outsiders get access to non-public information of a company through a source, mostly an insider, when such information is used during securities, such trader has betrayed the trust of the source and has committed securities fraud. 

Misappropriation theory is used in the securities markets to protect traders from outsiders who have aces to non-public information and can use such information to commit fraud.