United States v. O'Hagan

Supreme Court of the United States · 1997 · Corporations

CorporationsSecurities RegulationInsider TradingTender Offers§ 10(b)Rule 10b-5§ 14(e)Rule 14e-3(a)

Facts

O'Hagan was a partner at Dorsey & Whitney, which represented Grand Metropolitan regarding a possible tender offer for Pillsbury. Although O'Hagan did no work on the matter, while the representation was ongoing he bought large quantities of Pillsbury call options and shares, then sold them after Grand Met publicly announced the tender offer and realized more than $4.3 million in profit. The indictment alleged that he used material, nonpublic information about the planned tender offer in breach of duties of trust and confidence owed to his firm and its client. A jury convicted him on multiple counts, including violations of § 10(b), Rule 10b-5, § 14(e), and Rule 14e-3(a).

Issue

Whether a person violates § 10(b) and Rule 10b-5 by trading on material, nonpublic information misappropriated in breach of a duty owed to the source of the information. Also, whether the SEC exceeded its authority under § 14(e) by adopting Rule 14e-3(a), which prohibits trading on undisclosed tender-offer information without requiring proof of a fiduciary-duty breach.

Rule

Under the misappropriation theory, a person 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, and trades without disclosing his intent to the source. Under § 14(e), the SEC may adopt prophylactic rules reasonably designed to prevent fraudulent acts in the tender-offer context, including Rule 14e-3(a)'s disclose-or-abstain requirement, even though the rule does not require proof of a fiduciary-duty breach in the circumstances presented here.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Nina Patel is a paralegal at Lakefront Legal Group in Chicago. Her firm represents a private equity bidder planning to acquire Red Mesa Robotics, and Nina secretly buys Red Mesa shares after reading confidential deal emails, without telling either the firm or the bidder.

If prosecutors charge Nina with securities fraud under § 10(b) and Rule 10b-5, which is the strongest basis for liability?

Explanation. Under the misappropriation theory, a person violates § 10(b) and Rule 10b-5 when she misappropriates confidential information for securities trading purposes in breach of a duty owed to the source of the information, and trades without disclosing her intent to that source. The deception runs to the source of the information, not necessarily to the trading counterparty, so outsider status to the issuer does not defeat liability. (Derived from United States v. O'Hagan (1997).)