United States v. O'Hagan

United States v. O'Hagan, 521 U.S. 642 (1997), was a United States Supreme Court case concerning insider trading and breach of U.S. Securities and Exchange Commission rule 10(b)-5.

Background

James O'Hagan was a partner at Minneapolis law firm Dorsey & Whitney. In July 1988, the firm was retained by Grand Metropolitan, a corporation with headquarters in London, which was considering an offer to takeover the Pillsbury Company, headquartered in Minneapolis. Even though he was not directly involved in the transaction, O'Hagan learned about the possible takeover by overhearing a discussion at lunch. In August 1988, O'Hagan began purchasing stock and options of the Pillsbury company, at around $39 per share.

By the end of September, O'Hagan owned approximately 5,000 shares of Pillsbury and 2,500 options – more than any other individual investor. In October, Grand Met announced the takeover bid and the price of Pillsbury stock rose to $60 per share. O'Hagan subsequently sold his stock at a profit of more than $4.3 million.^[1]

Judgment

Because O'Hagan was not directly involved in the proposed takeover, he was not obliged by SEC rules to refrain from trading Pillsbury's stock or to disclose his transactions. Though it didn't find O'Hagan in violation of SEC rules regarding trading by company insiders – known as the "classical doctrine theory" – the Supreme Court adopted an additional doctrine, the "misappropriation theory" set out by Burger J in Chiarella v United States.^[2] The misappropriation theory refers to agency law, by which O'Hagan owes a duty as an agent not to misappropriate any of his principal's resources, including confidential information.

References