What is the attribution Theory
The theory of attribution postulates that a person who uses insider information to trade securities committed fraud in relation to the source of information. In the United States, a person who is guilty according to the theory of attribution is likely to be guilty of insider trading.
Penetration ‘Theory of appropriation’
The theory of attribution differs from the classical theory of insider trading. According to the classical theory, the person who is not an insider, but who learns of material non-public information and uses it to trade, is not guilty of insider trading. The classical theory assumes that the person accused of insider trading to be a real insider, officer or employee of the company whose securities he/she buys or sells. According to this theory, only corporate insider owes a fiduciary duty to the Corporation and its shareholders not to participate in the purchase or sale of securities of the Corporation with the use of material non-public information. The outsider who happens across some material non-public information not owe fiduciary duties and cannot be guilty of insider trading.
According to the theory of appropriation, however, the outsider who is going through some significant nonpublic information of the Corporation may not use that information to trade, because he/she owes fiduciary duties to the source of the information.
The theory of attribution has gained prominence in the sentence of the Supreme Court James H. O Hagan. O Hagan was a lawyer who acted on insider information in relation to proposals for takeover of Pillsbury. United States V. O Hagan was a critical case for theory.
The theory of appropriation is designed to protect the securities market from outsiders with access to confidential corporate information, but not the obligation of fiduciary duty to the Corporation or its shareholders.