Let's say you hear two executives of a publicly-traded company discussing, in a public space, an upcoming earnings report, impending product release, bankruptcy, or some other material information that is non-public.
Is it illegal to trade that company's stock based on the non-public information you overheard?
P.S. I don't actually have any such information, I'm just curious.
It should be legal (though I can't find an analogous case where the court has ruled that it is). There is a regulation summarizing the government's position (thus, what will be enforced in 17 CFR 240.10b, which prohibits use of "manipulative or deceptive device or contrivance" in stock trading. Section 240.10b5-1 says:
The “manipulative and deceptive devices” prohibited by Section 10(b) of the Act (15 U.S.C. 78j) and §240.10b-5 thereunder include, among other things, the purchase or sale of a security of any issuer, on the basis of material nonpublic information about that security or issuer, in breach of a duty of trust or confidence that is owed directly, indirectly, or derivatively, to the issuer of that security or the shareholders of that issuer, or to any other person who is the source of the material nonpublic information.
The executives clearly have a direct duty of trust of confidence. Section 240.10b5-2 enumerates the following duties:
(1) Whenever a person agrees to maintain information in confidence;
(2) Whenever the person communicating the material nonpublic information and the person to whom it is communicated have a history, pattern, or practice of sharing confidences, such that the recipient of the information knows or reasonably should know that the person communicating the material nonpublic information expects that the recipient will maintain its confidentiality; or
(3) Whenever a person receives or obtains material nonpublic information from his or her spouse, parent, child, or sibling; provided, however, that the person receiving or obtaining the information may demonstrate that no duty of trust or confidence existed with respect to the information, by establishing that he or she neither knew nor reasonably should have known that the person who was the source of the information expected that the person would keep the information confidential, because of the parties' history, pattern, or practice of sharing and maintaining confidences, and because there was no agreement or understanding to maintain the confidentiality of the information.
In the hypothetical, (1) is plainly not applicable. (2) is predicated on having a relationship (which doesn't exist) and the information-having expecting you to keep the information secret (he doesn't know that you have overheard them). (3) is likewise not applicable. The basic rule is that you can't "misapproprate" information, but you can use information that falls into your lap (even from a person who has a duty to not disclose the information).
This subsection starts saying "For purposes of this section, a “duty of trust or confidence” exists in the following circumstances, among others", which means they aren't necessarily giving you an exhaustive list. Still, there is currently no legal basis for prosecuting a person who overhears information from someone he has no relationship to, even if you are pretty confident that the information has not been made public.
It's illegal to trade on misappropriated "insider information" over which one has a fiduciary duty. This extends not only to the executives in question, but to their spouses, blood relations and friends, etc. Basically anyone to whom they have a connection, and hope to see again.
If the person in question does not know the executives from which s/he overheard the information, and has no (known) connection to them, then there was no "misappropriation" of the insider information. They gave it to you "freely" (although unknowingly). It would be same as if you were passing by a corporate site where they were running some tests, and were impressed by those tests.
And if you didn't know for sure that the information was non-public, you'd be even safer. Basically, the less you know, the safer you are. Here is a case where "ignorance" is a defense.
