Tuesday, March 12, 2013

United States v. O’Hagan case brief

United States v. O’Hagan case brief summary
521 U.S. 642

PROCEDURAL POSTURE: Petitioner sought review of the judgment of the United States Court of Appeals for the Eighth Circuit reversing all of respondent's convictions for securities fraud.

OVERVIEW: Respondent was a partner in a law firm which represented a company regarding a potential tender offer for the common stock of another company. During the representation, respondent purchased call options for the other company's stock and sold them for a significant profit. After the Securities Exchange Commission initiated an investigation into respondent's transactions, a jury convicted respondent of securities fraud.

On writ of certiorari, the Court held that criminal liability under § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C.S. § 78j(b)) may be predicated on the misappropriation theory.

The court also held that Securities Exchange Commission Rule 14e-3(a) was the proper exercise of the Commission's prophylactic powers under § 14e of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78n(e), regarding the prevention of the misappropriation charged against respondent.

OUTCOME: The Court reversed the judgment of the court of appeals holding that criminal liability under the Securities Exchange Act of 1934 may be predicated on the misappropriation theory.

Section 14(e) and Rule 14e-3 create an insider trader violation in tender offer situations.
-A person who trades in securities for personal profit, using confidential information that was misappropriated in a breach of fiduciary duty violates 10(b) and 10(b)(5)
-10(b)(5) The rule prohibits any act or omission resulting in fraud or deceit in connection with the purchase or sale of any security.
-To what extent Rule 10b-5 prohibits insider trading is a matter of some dispute. The SEC has long advocated an "equal access theory" with regard to 10b-5, arguing that anyone who has material, non-public information must either disclose that information or abstain from trading.
-However, the Supreme Court rejected the strongest version of that theory in Chiarella v. United States, holding a person with no fiduciary duty to the shareholders had no duty to disclose information before trading on it. Recently, the Supreme Court has embraced a "misappropriation" theory of omissions, holding in United States v. O'Hagan that misappropriating confidential information for securities trading purposes, in breach of a duty owed to the source of that information, gives rise to a duty to disclose or abstain.

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