GINSBURG, J.: . . . Respondent James Herman O’Hagan was a

GINSBURG, J.: . . . Respondent James Herman O’Hagan was a

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 comp any based in London, England, retained Dorsey &  as local counsel to represent Grand Met regardmg a potential tender offer for the common stock of the Pillsbury Company, headquartered if . Both Grand Met and Dorsey & Whitney took precautions to protect the confidentiality of Grand Met's tender offer plans. O'Hagan did no work on. the Grand Met representation. Dorsey & Whitney  from representing Grand Met on September 9, 1988. Less than a month later, on October 4, 1988, Grand Met publicly announced its tender offer for Pillsbury stock. On August 18, 1988, while Dorsey &  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 m September 1988. Later in August and in September,  made additional purchases of Pillsbury call  . . By the end of September, he owned 2,500 unexpired Pillsbury . . O'Hagan also purchased, Ill September . . . 1988 some 5 000 shares of Pillsbury common stock ' at a price just' under $39 per share. When Grand Met announced its tender offer in October, the once aa of Pillsbury stock rose to nearly $60 per share. 0  then sold his Pillsbury call options an? common stock, making a profit of more than $4.3 million. . . (SEC The Securities and Exchange Commission . or Commission) initiated an  7 n Into. I · “ m a 5 -count O'Hagan's ,  O'H indictment. The indictment all  that e :  defrauded his law firm and Its client, Grand M ' y
using for his own trading purposes material, nonpublic information regarding Grand Met's planned tender offer …. A divided panel of the Court of Appeals for the  Circuit reversed all of O'Hagan's convictions. Lability under § lO(b) and Rule lOb-5, , ;ho Eighth Circuit held may not be grounded on the misappropriation theory” of securities fraud on which the prosecution relied …. Decisions of the Courts of Appeals are in conflict on the propriety of the misappropriation theory under § lO(b) and Rule lOb-5 …. We granted certiorari and now reverse the Eighth Circuit's judgment …. In pertinent part, § lO(b) of the Exchange Act provides: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange- … (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. The statute thus proscribes (1) using any deceptive device (2) in connection with the purchase or sale of securities, in contravention of rules prescribed by the Commission. The provision, as written, does not confine its coverage to deception of a purchaser or seller of securities; rather, the statute reaches any deceptive device used in connection with the purchase or sale of any security. Pursuant to its § lO(b) rulemaking authority, the Commission has adopted Rule lOb-5, which, as relevant here, provides: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, [or] … (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. . . : . Under the “traditional” or “classical theory” of ms1der trading liability, § lO(b) and Rule lOb-5 are violated when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information …. The “misappropriation theory” holds that a person commits fraud “in connection with” a securities transaction, and thereby violates § lO(b) and Rule lOb-5, when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information. 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. In lieu of premising liability on a fiduciary relationship between company insider and purchaser or seller of the company's stock, the misappropriation theory premises liability on a fiduciary-turned-trader's deception of those who entrusted him with access to confidential 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 non-public 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 protect the integrity of the securities markets against abuses by outsiders to a corporation who have access to confidential information that will affect the corporation's security price when revealed, but who owe no fiduciary or other duty to that corporation's shareholders. In this case, the indictment alleged that O'Hagan, in breach of a duty of trust and confidence he owed to his law firm, Dorsey & Whitney, and to its client, Grand Met, traded on the basis of nonpublic information regarding Grand Met's planned tender offer for Pillsbury common stock. This conduct, the Government charged, constituted a fraudulent device in connection with the purchase and sale of securities. We agree with the Government that misappropriation, as just defined, satisfies§ lO(b)'s requirement that chargeable conduct involve a “deceptive device or contrivance” used “in connection with” the purchase or sale of securities. We observe, first, that , as the Government describes them, deal in deception. A fiduciary who “[pretends] loyalty to the principal while secretly converting the principal's information for personal gain,” “dupes” or defrauds the principal. … Deception through nondisclosure is central to the theory of liability for which the Government seeks . As counsel for the Government stated in explanation of the theory at oral argument: “To satisfy the common law rule that a trustee may not use the property that [has] been entrusted [to] him, there would have to be consent. To satisfy the requirement of the Securities Act that there be no deception, there would only have to be disclosure.” … [F]ull disclosure forecloses liability under the misappropriation theory: 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 § lO(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 § lO(b) requirement that the  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 information to purchase or sell securities. The securities transaction and the breach of duty thus coincide. This is so even though the person or entity defrauded is not the other party to the trade; but is, instead, the source of the nonpublic information. A  who trades on the basis of material, nonpublic information, in short, gains his advantageous market position through deception; he deceives the source of the information and simultaneously harms members of the investing public. The misappropriation theory targets information of a sort that  ordinarily capitalize upon to gain no-risk profits through the purchase or sale of securities …. The misappropriation theory comports with § lO(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-turned to an animating purpose of the Exchange Act: to insure honest securities markets  and there by promot in_  confidence. Although mformat10nal d1spanty IS mevitable in the securities markets, investors likely would hesitate to venture their capital in a market where trading based on  no , public in format on is unchecked by . _ mvest _ or s mformat10nal dtsadvantage vis-a-vis a _  with material, nonpublic informatlOn stems from contrivance, not luck; it is a disadvantage that cannot be overcome with research or skill. In sum, considering the inhibiting impact on market participation of trading on misappropriated information, and the congressional purposes  ­ ing§ lO(b), it makes scant sense to hold a lawyer hke O'Hagan a § lO(b) violator if he works for a law firm representing the target of a tender offer, but not if he works for a law firm representing the bidder. The text of the statute requires no such result. The misappropriation at issue here was properly made the subject of a§ lO(b) charge because it meets the statutory requirement that there be “deceptive” conduct “in connection with” securities transactions …. . . . [T]he misappropriation theory, as we have examined and explained it in this opinion, is both consistent with the statute and with our precedent. Vital to our decision that criminal liability may be sustained under the misappropriation theory, we emphasize, are two sturdy safeguards Congress has provided regarding scienter. To establish a criminal violation of Rule lOb-5, the Government must prove that a person “willfully” violated the provision. Furthermore, a defendant may not be imprisoned for violating Rule lOb-5 if he proves that he had no knowledge of the rule …. The Eighth Circuit erred in holding that the misappropriation theory is inconsistent with§ lO(b). The Court of Appeals may address on remand O'Hagan's other challenges to his convictions under § lO(b) and Rule lOb-5 ….
Case Question
1. What was O'Hagan accused of doing that was illegal?
2. What is the theory that the SEC argues is the basis of O'Hagan's wrongdoing?
3. How did the trial court and the appellate court rule in this case?
4. What reasons did the Supreme Court give for finding that the misappropriation theory is appropriate? 5. According to the Supreme Court, when and against whom did the misappropriation occur?
 

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