Cengage Advantage Books: Foundations of the Legal Environment of Business 3rd Edition by Marianne Jennings

Exercise 18

United States v. O'Hagan 521 U.S. 657 (1997)
Pillsbury Dough Boy: The Lawyer/Insider Who Cashed In
Facts
James Herman O'Hagan (respondent) 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, retained Dorsey Whitney as local counsel to represent it in a potential tender offer for common stock of Pillsbury Company (based in Minneapolis).
Mr. O'Hagan did not work on the Grand Met matter, so on August 18, 1988, he began purchasing call options for Pillsbury stock. Each option gave him the right to purchase 100 shares of Pillsbury stock. By the end of September, Mr. O'Hagan owned more than 2,500 Pillsbury options. Also in September, Mr. O'Hagan purchased 5,000 shares of Pillsbury stock at $39 per share.
Grand Met announced its tender offer in October, and Pillsbury stock rose to $60 per share. Mr. O'Hagan sold his call options and made a profit of $4.3 million. The SEC indicted Mr. O'Hagan on 57 counts of illegal trading on inside information and other charges. Mr. O'Hagan was convicted by a jury on all 57 counts and sentenced to 41 months in prison. A divided Court of Appeals reversed the conviction, and the SEC appealed.
Judicial Opinion
GINSBURG, Justice
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. Under this theory, a fiduciary's undisclosed, [S]elf-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.
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" "dupes" or defrauds the principal.
An investor's informational disadvantage visà- vis a misappropriator with material, nonpublic information stems from contrivance, not luck; it is a disadvantage that cannot be overcome with research or skill.
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.
[W]e emphasize … two sturdy safeguards Congress has provided regarding scienter. To establish a criminal violation of Rule 10b-5, the Government must prove that a person "willfully" violated the provision. In addition, the statute's "requirement of the presence of culpable intent as a necessary element of the offense does much to destroy any force in the argument that application of the [statute]" in circumstances such as O'Hagan's is unjust.
Reversed.
Case Questions
1. What does the court say the misappropriation theory is?
2. Did Mr. O'Hagan make money from non-public information?
3. Could others have done research and obtained the same information Mr. O'Hagan had?