United States v. O'Hagan (1996)

United States Court of Appeals for the Eighth Circuit · 1996 · Corporations

92 F.3d 612 (8th Cir. 1996)

Updated August 22, 2026

CorporationsSecurities fraudInsider tradingTender offersMail fraudMoney launderingSection 10(b)Rule 10b-5

Facts

O'Hagan was a partner at Dorsey & Whitney, which Grand Met retained as local counsel while considering and preparing for a possible acquisition of Pillsbury. Beginning in August 1988, O'Hagan purchased large quantities of Pillsbury call options and also bought Pillsbury common stock before Grand Met publicly announced its tender offer on October 4, 1988. After the announcement caused Pillsbury's stock price to rise sharply, O'Hagan exercised the options and sold the stock for a profit of more than $4 million. The government prosecuted the § 10(b) counts solely on a misappropriation theory based on O'Hagan's alleged breach of duties to Dorsey & Whitney and Grand Met, and prosecuted the § 14(e) counts under Rule 14e-3(a).

Issue

Whether § 10(b) and Rule 10b-5 permit criminal liability under the misappropriation theory when the trader allegedly breaches duties to the source of confidential information rather than to parties to the securities transaction or other market participants. Whether the SEC exceeded its authority under § 14(e) by promulgating Rule 14e-3(a) without requiring a breach of fiduciary duty.

Rule

Section 10(b) reaches only conduct involving manipulation or deception, and deception requires a material misrepresentation or nondisclosure in violation of a duty to disclose; a mere breach of fiduciary duty is not enough. The required fraud must be in connection with the purchase or sale of securities, meaning the duty breached must run to parties to the transaction or, at most, other market participants. Under § 14(e), the SEC may define and prescribe means to prevent acts and practices that are fraudulent, but it may not redefine fraud itself; fraudulent conduct under § 14(e) includes a breach of fiduciary obligation or similar relationship of trust and confidence.

See the holding & full analysis

Create a free KwikCourt account to unlock the rest of this brief — and practice the case.

The court's holding and reasoning
Doctrine tests, pitfalls & exam hypotheticals
10 practice questions + 4 AI-graded essays on this case

Free sample · practice this case

Test yourself

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

Leah Moreno works as an accountant at Cedar Point Advisory in Denver. While helping a client prepare a confidential bid for a publicly traded food company, she secretly buys call options in the target using the information, but she has no relationship with the target’s shareholders and says nothing to anyone in the market.

If federal prosecutors in the Eighth Circuit charge Leah under § 10(b) and Rule 10b-5 solely because she breached duties to her employer and client by using confidential information to trade, what is the strongest argument for Leah?

Explanation. Under the majority opinion, the misappropriation theory is not a valid basis for criminal liability under § 10(b). Deception requires a material misrepresentation or nondisclosure in violation of a duty to disclose, and the duty must run to parties to the securities transaction or, at most, other market participants. A duty owed only to the employer or client that supplied the information is insufficient.