Reference no: EM132210900

Susan Waldbaum was a niece of the president and controlling shareholder of Waldbaum, Inc. Susan’s mother (the president’s sister) told Susan that the company was going to be sold at a favorable price and that a tender offer was soon to be made. She told Susan not to tell anyone except her husband, Keith Loeb, about the sale. The next day, Susan told her husband of the sale and cautioned him not to tell anyone, because “it could possibly ruin the sale.” The day after he learned of the sale, Loeb called Robert Chestman, his broker, and told him that he “had some accurate information” that the company was about to be sold at a price “substantially higher” than the market value of its stock. That day, Chestman purchased shares of the company for himself, as well as for Loeb. Chestman was later convicted by a jury of, among other things, trading on misappropriated inside information in violation of SEC Rule 10b-5. On appeal, the central question in regard to liability under the misappropriation theory was whether Chestman had acquired the inside information about the Waldbaum company as a result of an insider’s breach of a fiduciary duty. Essentially, the inquiry focused on whether Loeb owed a fiduciary duty to his wife’s family or to his wife to keep the information confidential. How should the court rule? [United States v. Chestman, 947 F.2d 551 (2d Cir. 1991)]