Catholic University Law Review


Kramer Ortman


Until SEC v. Bauer, insider trading has never been applied within the context of an open-ended mutual fund. In alleging insider trading against Jilaine Bauer, an account executive of a mutual fund, the SEC originally won summary judgment; however, the case on appeal saw the SEC drop its original theory, the classical theory of insider trading, in favor of the alternative misappropriation theory. This Note argues that the misappropriation theory applies in the context of open-ended mutual funds by recognizing that the policy reasons underlying the prohibitions against insider trading are centered on the principles of fairness, market integrity, and market efficiency. Although the classical and misappropriation theories, in their current form, have allowed for increased ease in determining whether a factual scenario fits a violation of insider trading, insider trading cannot be forced into a predetermined mold. When applying Bauer's factual scenario to the current theories of insider trading, it must be done recognizing the flexibility of the doctrine and appreciating the policy reasons for the rule. For this reason, the court cannot constrict its view of insider trading and discount the fraudulent conduct of Bauer.