## Facts

- The SEC brought a civil enforcement action under Exchange Act § 10(b) and Rule 10b-5 arising from trading in Cubist Pharmaceuticals, Inc. stock.
- Scott Rocklage, Cubist’s chairman and CEO, regularly shared confidential, nonpublic company information with his wife, Patricia Rocklage, with the understanding she would keep it confidential.
- Patricia allegedly had a prior agreement with her brother, William Beaver, to tip him if she learned significant negative information about Cubist.
- The SEC alleged Patricia deceptively obtained highly negative, material nonpublic information from her husband by concealing both (i) the prior tipping arrangement and (ii) her intent not to honor the confidentiality her husband reasonably believed bound her.
- After learning a key Cubist drug failed a clinical trial, Patricia told her husband she intended to tell Beaver; he asked her not to do so.
- Patricia nonetheless tipped Beaver shortly thereafter, at a time when the SEC alleged her husband could do little to prevent the tip or ensuing trading.
- Beaver sold his Cubist stock the next trading day and tipped his friend David Jones, who also sold.
- Defendants moved to dismiss under Rule 12(b)(6), arguing Patricia’s pre-tip disclosure to her husband eliminated deception and foreclosed misappropriation liability; the district court denied the motion and certified an interlocutory appeal.

## Issues

1. Whether a complaint states a misappropriation-theory insider-trading claim when the alleged deception occurred in acquiring confidential information, but the defendant later disclosed to the information source an intention to tip before the tip and trading occurred.
2. Whether the SEC plausibly alleged a duty of trust and confidence between spouses sufficient to support misappropriation liability based on deceptive acquisition and tipping.
3. Whether the SEC plausibly alleged tippee and downstream tippee liability for recipients who traded after receiving the allegedly misappropriated information.
4. Whether, in the alternative, the complaint plausibly stated a claim under a temporary-insider variant of the classical theory.

## Decision

- The First Circuit affirmed the denial of the Rule 12(b)(6) motion to dismiss.
- The court held the complaint plausibly alleged misappropriation because it alleged deception in the acquisition of material nonpublic information, even though Patricia later disclosed an intent to tip.
- The court rejected the argument that a pre-tip disclosure to the information source categorically cures prior deception or creates an automatic bar to § 10(b) liability.
- Because primary liability was plausibly pleaded against Patricia, the court held the complaint also plausibly alleged tippee liability against Beaver and downstream tippee liability against Jones.
- The court further held the complaint plausibly stated an alternative theory that Patricia acted as a temporary insider who breached duties by tipping and enabling trading.

## Legal Principles

- Misappropriation-theory liability under § 10(b) may be based on deception of the information source in obtaining confidential information for trading or tipping purposes.
- Deception can be complete at acquisition; later disclosure of an intent to tip or trade does not necessarily negate earlier deceptive conduct, particularly when alleged to occur after acquisition and too late for the source to protect the information.
- A duty of trust and confidence sufficient for misappropriation may be plausibly alleged where spouses repeatedly share confidential corporate information with an understanding of confidentiality.
- Tippee and downstream tippee liability may be plausibly alleged where recipients obtain material nonpublic information traceable to a breach of duty and trade while knowing or having reason to know of that breach.
- At the pleading stage, it is sufficient that the allegations support at least one viable § 10(b) theory, including misappropriation or a temporary-insider/classical-theory variant.

## Conclusion

The First Circuit permitted the SEC’s case to proceed, holding that allegations of deceptive acquisition of confidential corporate information can support misappropriation-based insider-trading claims even when the defendant later announces an intent to tip, and that related tippee claims may proceed where the complaint plausibly pleads trading on information obtained through a breach of duty.


Sec. & Exch. Comm’n v. Rocklage, 470 F.3d 1 (1st Cir. 2006)