Respondent James Herman O’Hagan was a partner in the law firm of Dorsey & Whitney in Minneapolis, Minnesota. In July 1988, Grand Metropolitan PLC (Grand Met), a company based in London, England, retained Dorsey & Whitney as local counsel to represent Grand Met regarding a potential tender offer for the common stock of the Pillsbury Company, headquartered in Minneapolis. Both Grand Met and Dorsey & Whitney took precautions to protect the confidentiality of Grand Met’s tender offer plans. O’Hagan did no work on the Grand Met representation. Dorsey & Whitney withdrew from representing Grand Met on September 9, 1988. Less than a month later, on October 4, 1988, Grand Met publicly announced its tender offer for Pillsbury stock.

On August 18, 1988, while Dorsey & Whitney was still representing Grand Met, O’Hagan began purchasing call options for Pillsbury stock. Each option gave him the right to purchase 100 shares of Pillsbury stock by a specified date in September 1988. Later in August and in September, O’Hagan made additional purchases of Pillsbury call options. By the end of September, he owned 2,500 unexpired Pillsbury options, apparently more than any other individual investor. [Citation.] O’Hagan also purchased, in September 1988, some 5,000 shares of Pillsbury common stock, at a price just under $39 per share. When Grand Met announced its tender offer in October, the price of Pillsbury stock rose to nearly $60 per share. O’Hagan then sold his Pillsbury call options and common stock, making a profit of more than $4.3 million.

[The Securities and Exchange Commission initiated an investigation into O’Hagan’s transactions, culminating in an indictment alleging that O’Hagan defrauded his law firm and its client, Grand Met, by using for his own trading purposes material, nonpublic information regarding Grand Met’s planned tender offer in violation of §10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b–5. A jury convicted O’Hagan and he was sentenced to a 41-month term of imprisonment. A divided panel of the Court of Appeals for the Eighth Circuit reversed O’Hagan’s conviction holding that liability under §10(b) and Rule 10b–5 may not be grounded on the ‘‘misappropriation theory’’ of securities fraud on which the prosecution relied.]

We address * * * the Court of Appeals’ reversal of O’Hagan’s convictions under §10(b) and Rule 10b–5. Following the Fourth Circuit’s lead, see [citation], the Eighth Circuit rejected the misappropriation theory as a basis for §10(b) liability. We hold, in accord with several other Courts of Appeals, that criminal liability under §10(b) may be predicated on the misappropriation theory.

Under the ‘‘traditional’’ or ‘‘classical theory’’ of insider trading liability, §10(b) and Rule 10b– 5 are violated when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a ‘‘deceptive device’’ under §10(b), we have affirmed, because ‘‘a relationship of trust and confidence [exists] between the shareholders of a corporation and those insiders who have obtained confidential information by reason of their position with that corporation.’’ [Citation.] That relationship, we recognized, ‘‘gives rise to a duty to disclose [or to abstain from trading] because of the ‘necessity of preventing a corporate insider from * * * tak[ing] unfair advantage of * * * uninformed * * * stockholders.’’’ [Citation.] The classical theory applies not only to officers, directors, and other permanent insiders of a corporation, but also to attorneys, accountants, consultants, and others who temporarily become fiduciaries of a corporation. [Citation.]

The ‘‘misappropriation theory’’ holds that a person commits fraud ‘‘in connection with’’ a securities transaction, and thereby violates §10(b) and Rule 10b–5, when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information. [Citation.] Under this theory, a fiduciary’s undisclosed, self-serving use of a principal’s information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of that information. In lieu of premising liability on a fiduciary relationship between company insider and purchaser or seller of the company’s stock, the misappropriation theory premises liability on a fiduciary-turned-trader’s deception of those who entrusted him with access to confidential information.

The two theories are complementary, each addressing efforts to capitalize on nonpublic information through the purchase or sale of securities. The classical theory targets a corporate insider’s breach of duty to shareholders with whom the insider transacts; the misappropriation theory outlaws trading on the basis of nonpublic information by a corporate ‘‘outsider’’ in breach of a duty owed not to a trading party, but to the source of the information. The misappropriation theory is thus designed to ‘‘protec[t] the integrity of the securities markets against abuses by ‘outsiders’ to a corporation who have access to confidential information that will affect th[e] corporation’s security price when revealed, but who owe no fiduciary or other duty to that corporation’s shareholders.’’ [Citation.]

In this case, the indictment alleged that O’Hagan, in breach of a duty of trust and confidence he owed to his law firm, Dorsey & Whitney, and to its client, Grand Met, traded on the basis of nonpublic information regarding Grand Met’s planned tender offer for Pillsbury common stock. [Citation.] This conduct, the Government charged, constituted a fraudulent device in connection with the purchase and sale of securities. [Court’s footnote: The Government could not have prosecuted O’Hagan under the classical theory, for O’Hagan was not an ‘‘insider’’ of Pillsbury, the corporation in whose stock he traded. * * *]

We agree with the Government that misappropriation, as just defined, satisfies §10(b)’s requirement that chargeable conduct involve a ‘‘deceptive device or contrivance’’ used ‘‘in connection with’’ the purchase or sale of securities. We observe, first, that misappropriators, as the Government describes them, deal in deception. A fiduciary who ‘‘[pretends] loyalty to the principal while secretly converting the principal’s information for personal gain,’’ [citation], ‘‘dupes’’ or defrauds the principal. [Citation.]

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* * * Because the deception essential to the misappropriation theory involves feigning fidelity to the source of information, if the fiduciary discloses to the source that he plans to trade on the nonpublic information, there is no ‘‘deceptive device’’ and thus no §10(b) violation— although the fiduciary-turned-trader may remain liable under state law for breach of a duty of loyalty.

We turn next to the §10(b) requirement that the misappropriator’s deceptive use of information be ‘‘in connection with the purchase or sale of [a] security.’’ This element is satisfied because the fiduciary’s fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities. The securities transaction and the breach of duty thus coincide. This is so even though the person or entity defrauded is not the other party to the trade, but is, instead, the source of the nonpublic information. [Citation.] A misappropriator who trades on the basis of material, nonpublic information, in short, gains his advantageous market position through deception; he deceives the source of the information and simultaneously harms members of the investing public. [Citation.]

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The misappropriation theory comports with §10(b)’s language, which requires deception ‘‘in connection with the purchase or sale of any security,’’ not deception of an identifiable purchaser or seller. The theory is also welltuned to an animating purpose of the Exchange Act: to insure honest securities markets and thereby promote investor confidence. [Citation.] Although informational disparity is inevitable in the securities markets, investors likely would hesitate to venture their capital in a market where trading based on misappropriated nonpublic information is unchecked by law. An investor’s informational disadvantage vis-a`-vis a misappropriator with material, nonpublic information stems from contrivance, not luck; it is a disadvantage that cannot be overcome with research or skill. [Citation.]

In sum, considering the inhibiting impact on market participation of trading on misappropriated information, and the congressional purposes underlying §10(b), it makes scant sense to hold a lawyer like O’Hagan a §10(b) violator if he works for a law firm representing the target of a tender offer, but not if he works for a law firm representing the bidder. The text of the statute requires no such result. The misappropriation at issue here was properly made the subject of a §10(b) charge because it meets the statutory requirement that there be ‘‘deceptive’’ conduct ‘‘in connection with’’ securities transactions.

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The judgment of the Court of Appeals for the Eighth Circuit is reversed, and the case is remanded for further proceedings consistent with this opinion.