OCTOBER TERM, 1996
certiorari to the united states court of appeals for the eighth circuit
No. 96-842. Argued April 16, 1997—Decided June 25, 1997
After Grand Metropolitan PLC (Grand Met) retained the law firm of Dorsey & Whitney to represent it regarding a potential tender offer for the Pillsbury Company's common stock, respondent O'Hagan, a Dorsey & Whitney partner who did no work on the representation, began purchasing call options for Pillsbury stock, as well as shares of the stock. Following Dorsey & Whitney's withdrawal from the representation, Grand Met publicly announced its tender offer, the price of Pillsbury stock rose dramatically, and O'Hagan sold his call options and stock at a profit of more than $4.3 million. A Securities and Exchange Commission (SEC) investigation culminated in a 57-count indictment alleging, inter alia, that O'Hagan defrauded his law firm and its client, Grand Met, by misappropriating for his own trading purposes material, nonpublic information regarding the tender offer. The indictment charged O'Hagan with securities fraud in violation of § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, with fraudulent trading in connection with a tender offer in violation of § 14(e) of the Exchange Act and SEC Rule 14e-3(a), and with violations of the federal mail fraud and money laundering statutes. A jury convicted O'Hagan on all counts, and he was sentenced to prison. The Eighth Circuit reversed all of the convictions, holding that § 10(b) and Rule 10b-5 liability may not be grounded on the "misappropriation theory" of securities fraud on which the prosecution relied; that Rule 14e-3(a) exceeds the SEC's § 14(e) rulemaking authority because the Rule contains no breach of fiduciary duty requirement; and that the mail fraud and money laundering convictions rested on violations of the securities laws, so could not stand once the securities fraud convictions were reversed.
Held: 1. A person who trades in securities for personal profit, using confidential information misappropriated in breach of a fiduciary duty to the source of the information, may be held liable for violating § 10(b) and Rule 10b-5. Pp. 649-666. (a) Section 10(b) proscribes (1) using any "deceptive device" (2) "in connection with the purchase or sale of any security," in contravention of SEC rules. The Commission adopted Rule 10b-5 pursuant to its § 10(b) rulemaking authority; liability under Rule 10b-5 does not ex-Page: Index 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Next
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