## Facts

- Grand Metropolitan PLC retained the law firm Dorsey & Whitney in 1988 regarding a potential tender offer for Pillsbury Company.
- James H. O’Hagan, a partner at the firm, learned of the potential tender offer through the firm but did not work on the matter.
- Using material, nonpublic information about the anticipated tender offer, O’Hagan purchased Pillsbury call options and common stock.
- After the tender offer became public and Pillsbury’s stock price increased, O’Hagan sold his position for profits exceeding $4.3 million.
- Following an SEC investigation, O’Hagan was indicted on 57 counts, including securities fraud under §10(b) and Rule 10b-5 (based on the misappropriation theory), tender-offer trading violations under §14(e) and Rule 14e-3(a), and related mail fraud and money laundering counts.
- A jury convicted O’Hagan on all counts; the court of appeals reversed, rejecting both the misappropriation theory under §10(b) and the SEC’s authority to adopt Rule 14e-3(a) without a fiduciary-breach element.

## Issues

1. Whether trading on confidential information misappropriated in breach of a duty to the information’s source constitutes a “deceptive device” “in connection with” a securities transaction under §10(b) and Rule 10b-5.
2. Whether the SEC validly promulgated Rule 14e-3(a) under §14(e) to bar trading on undisclosed tender-offer information without requiring proof of a fiduciary duty or a duty to disclose.

## Decision

- The Supreme Court reversed the court of appeals and held that the misappropriation theory is a valid basis for liability under §10(b) and Rule 10b-5.
- The Court held that a trader commits deception by secretly using confidential information entrusted by the source, breaching duties of loyalty and confidentiality, and using that information for securities trading.
- The Court concluded the fraud is “in connection with” the purchase or sale of securities because it is completed when the trader uses the information to trade.
- The Court upheld Rule 14e-3(a) as a valid exercise of the SEC’s §14(e) authority to prevent fraudulent, deceptive, or manipulative acts in the tender-offer context, even absent a fiduciary-breach requirement.
- The Court remanded for further proceedings, including treatment of the mail fraud and money laundering convictions that depended on the securities-law predicates.

## Legal Principles

- §10(b) and Rule 10b-5 reach outsider trading based on the misappropriation theory when a person trades for personal gain using confidential information misappropriated through an undisclosed breach of duty to the information’s source.
- The deception under the misappropriation theory is the feigned loyalty to the source while secretly converting entrusted information for securities trading.
- The “in connection with” element is satisfied when the deceptive breach and the securities transaction are linked by the use of the information to execute trades.
- Under §14(e), the SEC may adopt preventive tender-offer rules targeting trading on material, nonpublic tender-offer information; Rule 14e-3(a) may prohibit such trading without requiring proof of a fiduciary duty or a separate duty to disclose.

## Conclusion

The Court confirmed that insider-trading liability under §10(b) and Rule 10b-5 extends to traders who secretly misuse confidential information obtained from a source to whom they owe duties of loyalty and confidentiality, and it sustained the SEC’s authority under §14(e) to prohibit trading on undisclosed tender-offer information through Rule 14e-3(a) even without a fiduciary-breach element.


United States v. O’Hagan, 521 U.S. 642 (1997)