CASE 43-4
UNITED STATES v. O’HAGAN
Supreme Court of the United States, 1997
521 U.S. 642, 117 S.Ct. 2199, 138 L.Ed.2d 724
http://scholar.google.com/scholar_case?q=117+S.CT.
+2199&hl=en&as_sdt=2,34&case=287189961484150105&scilh=0
Ginsburg, J.
Respondent James Herman O’Hagan 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, England, retained Dorsey & Whitney as local counsel to represent Grand
Met regarding a potential tender offer for the common stock of the Pillsbury Company,
headquartered in Minneapolis. Both Grand Met and Dorsey & Whitney took precautions to
On August 18, 1988, while Dorsey & Whitney was still representing Grand Met,
O’Hagan began purchasing call options for Pillsbury stock. Each option gave him the right
to purchase 100 shares of Pillsbury stock by a specified date in September 1988. Later in
August and in September, O’Hagan made additional purchases of Pillsbury call options. By
the end of September, he owned 2,500 unexpired Pillsbury options, apparently more than
any other individual investor. [Citation.] O’Hagan also purchased, in September 1988, some
5,000 shares of Pills- bury common stock, at a price just under $39 per share. When Grand
Met announced its tender offer in October, the price of Pillsbury stock rose to nearly $60 per
share. O’Hagan then sold his Pillsbury call options and common stock, making a profit of
more than $4.3 million.
[The Securities and Exchange Commission initiated an investigation into O’Hagan’s
transactions, culminating in an indictment alleging that O’Hagan defrauded his law firm and
its client, Grand Met, by using for his own trading purposes material, nonpublic information
regarding Grand Met’s planned tender offer in violation of §10(b) of the Securities
We address * * * the Court of Appeals’ reversal of O’Hagan’s convictions under §10(b)
and Rule 10b-5. Following the Fourth Circuit’s lead, see [citation], the Eighth Circuit
rejected the misappropriation theory as a basis for § 10(b) liability. We hold, in accord with
several other Courts of Appeals, that criminal liability under §10(b) may be predicated on
the misappropriation theory.
Under the “traditional” or “classical theory” of insider trading liability, §10(b) and Rule
10b-5 are violated when a corporate insider trades in the securities of his corporation on the
basis of material, nonpublic information. Trading on such information qualifies as a
“deceptive device” under §10(b), we have affirmed, because “a relationship of trust and
confidence [exists] between the shareholders of a corporation and those insiders who have
obtained confidential information by reason of their position with that corporation.”
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. [Citation.] Under this theory, a fiduciary’s undisclosed,
self-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.
The two theories are complementary, each addressing efforts to capitalize on nonpublic
information through the purchase or sale of securities. The classical theory targets a
corporate insider’s breach of duty to shareholders with whom the insider transacts; the
misappropriation theory outlaws trading on the basis of nonpublic information by a
corporate “outsider” in breach of a duty owed not to a trading party, but to the source of the
information. The misappropriation theory is thus designed to “protec[t] the integrity of the
securities markets against abuses by ‘outsiders’ to a corporation who have access to
confidential information that will affect th[e] corporation’s security price when revealed, but
who owe no fiduciary or other duty to that corporation’s shareholders.” [Citation.]
The Government could not have prosecuted O’Hagan under the classical theory, for
O’Hagan was not an “insider” of Pillsbury, the corporation in whose stock he traded. * * *]
We agree with the Government that misappropriation, as just defined, satisfies §10(b)’s
requirement that chargeable conduct involve a “deceptive device or contrivance” used “in
* * *
* * * Because the deception essential to the misappropriation theory involves feigning
fidelity to the source of information, if the fiduciary discloses to the source that he plans to
trade on the nonpublic information, there is no “deceptive device” and thus no §10(b)
violation—although the fiduciary-turned-trader may remain liable under state law for breach
of a duty of loyalty.
We turn next to the §10(b) requirement that the misappropriator’s deceptive use of
information be “in connection with the purchase or sale of [a] security.” This element is
satisfied because the fiduciary’s fraud is consummated, not when the fiduciary gains the
confidential information, but when, without disclosure to his principal, he uses the
* * *
The misappropriation theory comports with §10(b)’s language, which requires deception
“in connection with the purchase or sale of any security,” not deception of an identifiable
purchaser or seller. The theory is also well-tuned to an animating purpose of the Exchange
Act: to insure honest securities markets and thereby promote investor confidence. [Citation.]
Although informational disparity is inevitable in the securities markets, investors likely
would hesitate to venture their capital in a market where trading based on misappropriated
nonpublic information is unchecked by law. An investor’s informational disadvantage
Express Insider Trading Liability
Section 20A imposes express civil liability on any person who buys or sells a
security while in possession of material, nonpublic information. Any person
who contemporaneously sold or purchased securities of the same class as
those improperly traded may bring a private action against the trader to
recover damages, not to exceed the profit gained or loss avoided by the
violation, less any amount the violator disgorges to the SEC pursuant to a
court order. The action must be brought within 5 years after the last
transaction. Tippers are jointly and severally liable with tippees.
Civil Monetary Penalties for Insider Trading
The SEC is authorized to have a civil penalty imposed upon any person who
is involved in insider trading, including any person who directly or indirectly
controlled a person who committed a violation. The trade must be on or
through the facilities of a national securities exchange or from or through a
broker or dealer. Purchases that are part of a public o’ering by an issuer are
not included.
The civil monetary penalty for a person who trades on inside information is
determined by the court but may not exceed three times the profit gained or
loss avoided. The maximum amount that may be imposed upon a controlling
person is the greater of $1,525,000 (as adjusted for inflation in March 2013)
or three times the profit gained or loss avoided. If the controlled person’s
Misleading Proxy Statements
Any person who distributes a materially false or misleading proxy statement
may be liable to a shareholder who relies upon the statement in purchasing
or selling and consequently su’ers a loss. Material means there is a
substantial likelihood that a reasonable shareholder would consider it
important in deciding how to vote. Courts have held that negligence is
Fraudulent Tender Offers
Section 14(e) makes it unlawful for any person to make any untrue
statement of material fact, to omit any material fact, or to engage in
fraudulent, deceptive, or manipulative practices in connection with a tender
o’er. Applies even if the target company is not subject to the 1934 Act’s
reporting requirements.
CASE 43-5
SCHREIBER v. BURLINGTON NORTHERN, INC.
Supreme Court of the United States, 1985
472 U.S. 1, 105 S.Ct. 2458, 86 L.Ed.2d 1
http://scholar.google.com/scholar_case?q=105+S.Ct.+2458&hl=en&as_sdt=2,34&case=1407924312497176128&scilh=0
Burger, C. J.
On December 21, 1982, Burlington Northern, Inc., made a hostile tender offer for El Paso
Gas Co. Through a wholly owned subsidiary, Burlington proposed to purchase 25.1 million
El Paso shares at $24 per share. Burlington reserved the right to terminate the offer if any of
several specified events occurred. El Paso management initially opposed the takeover, but its
shareholders responded favorably, fully subscribing the offer by the December 30, 1982
deadline.
senior officers. By February 8, more than 40 million shares were tendered in response to
Burlington’s January offer, and the takeover was completed.
The rescission of the first tender offer caused a diminished payment to those
shareholders who had tendered during the first offer. The January offer was greatly
oversubscribed and consequently those shareholders who retendered were subject to
substantial proration. Petitioner Barbara Schreiber filed suit on behalf of herself and
similarly situated shareholders, alleging that Burlington, El Paso, and members of El Paso’s
* * *
We are asked in this case to interpret §14(e) of the Securities Exchange Act, [citation].
The starting point is the language of the statute. Section 14(e) provides:
It shall be unlawful for any person to make any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made, in the light of the
circumstances under which they are made, not misleading, or to engage in any fraudulent,
deceptive or manipulative acts or practices, in connection with any tender offer or request or
invitation for tenders, or any solicitation of security holders in opposition to or in favor of any
such offer, request, or invitation. The Commission shall, for the purposes of this subsection, by
rules and regulations define, and prescribe means reasonably designed to prevent, such acts and
practices as are fraudulent, deceptive, or manipulative. [Citation.]
Ernst & Ernst v. Hochfelder [see Chapter 44].
* * * The meaning the Court has given the term “manipulative” is consistent with the use
of the term at common law, and with its traditional dictionary definition.
* * *
Our conclusion that “manipulative” acts under §14(e) require misrepresentation or
nondisclosure is buttressed by the purpose and legislative history of the provision. Section
14(e) was originally added to the Securities Exchange Act as part of the Williams Act,
[citation]. “The purpose of the Williams Act is to insure that public shareholders who are
confronted by a cash tender offer for their stock will not be required to respond without
adequate information.” [Citation.]
* * *
Nowhere in the legislative history is there the slightest suggestion that §14(e) serves any
purpose other than disclosure, or that the term “manipulative” should be read as an invitation
to the courts to oversee the substantive fairness of tender offers; the quality of any offer is a
matter for the marketplace.
Antibribery Provision of FCPA
The Foreign Corrupt Practices Act enacted in the early 1970s makes it
unlawful for any domestic concern or any of its o9cers, directors,
employees, or agents to o’er or give anything of value directly or indirectly
to any foreign o9cial, political party, or political o9cial for the purpose of (1)
in+uencing any act or decision of that person or party in his or its o9cial
Violations can result in fines of up to $2 million for corporations and other
business entities; individuals may be fined a maximum of $100,000 or
imprisoned up to 5 years, or both. Moreover, under the Federal Alternative
Fines Act, the actual fine may be up to twice the benefit that the person
sought to obtain by making the corrupt payment. Fines imposed upon
individuals may not be paid directly or indirectly by the domestic concern on
whose behalf they acted; the individuals must pay the fines themselves. In
Criminal Sanctions
Section 32 of the 1934 Act imposes criminal sanctions on any person who
willfully violates any provision of the act (except the antibribery provision) or
the rules and regulations promulgated by the SEC pursuant to the act. For
individuals, conviction may carry a fine of not more than $1 million or
imprisonment of not more than 10 years, or both, with one exception: a