United States V. O’Hagan Misappropriation Theory
United States v. O’Hagan (1997)
Facts:
James O’Hagan, a partner at a law firm, learned confidential information about a company (Pillsbury) planning a takeover of another company (Grand Metropolitan). He used that information to buy stock options in Grand Metropolitan before the public announcement and profited from the subsequent price rise.
Legal Issue:
The key question was whether someone who misappropriates confidential information (without being a corporate insider or tipping someone who is) violates insider trading laws.
Holding:
The Supreme Court held that O’Hagan violated securities laws under the misappropriation theory. This theory treats a person who uses confidential information in breach of a duty owed to the source of the information as committing fraud “in connection with” a securities transaction.
Significance:
Expanded insider trading liability beyond classical insider trading (corporate insiders).
Recognized that misuse of confidential info from any source violates the law if there's a duty of trust.
Other Important Cases Applying the Misappropriation Theory
1. Chiarella v. United States (1980)
Facts:
Vincent Chiarella, a printer, deduced the identities of companies involved in takeover bids and traded based on that info without disclosure.
Legal Issue:
Whether the duty to disclose applies when the defendant is not an insider but has obtained confidential info through deduction.
Outcome:
The Supreme Court ruled against conviction, holding no duty existed since Chiarella was not an insider or fiduciary.
Laid groundwork showing classical insider trading needs a fiduciary duty.
Significance:
Clarified limits of insider trading law before O’Hagan.
Showed the gap that the misappropriation theory later filled.
2. SEC v. Texas Gulf Sulphur Co. (1968)
Facts:
Executives learned of significant mineral discoveries and traded stock before public disclosure.
Legal Issue:
Classical insider trading liability for trading on material nonpublic info.
Outcome:
The court ruled that insiders must either disclose or abstain from trading.
Established early standards for insider trading.
Significance:
Classical theory case — fiduciaries trading on company info.
3. United States v. Newman (2014)
Facts:
Raj Rajaratnam’s hedge fund traders received insider info from company employees. Newman, a portfolio manager, was convicted based on receiving tips.
Legal Issue:
What is the standard for tippee liability and knowledge of breach of fiduciary duty?
Outcome:
The Second Circuit overturned convictions, holding tippees must know the tipper breached a duty and received a personal benefit.
Narrowed scope of insider trading liability.
Significance:
Raised burden of proof on prosecutors.
Misappropriation theory still applies but tippee liability stricter.
4. United States v. Salman (2016)
Facts:
Salman was convicted of insider trading for trading on tips from his brother-in-law who was an insider.
Legal Issue:
Whether a gift of confidential info to a relative with no financial benefit constitutes breach of fiduciary duty.
Outcome:
The Supreme Court affirmed conviction.
Held that a gift to a relative satisfies the personal benefit element in insider trading.
Significance:
Clarified scope of tippee liability under classical and misappropriation theories.
5. United States v. Blaszczak (2019)
Facts:
Blaszczak, a trader, received confidential info from government officials about upcoming policies, trading on that info.
Legal Issue:
Application of misappropriation theory to non-company insiders.
Outcome:
Convicted for insider trading based on misappropriation.
Courts confirmed non-classical insider trading liability.
Significance:
Reinforced that government information can also trigger misappropriation liability.
Expanded the theory beyond corporate contexts.
Summary Table:
| Case | Key Issue | Outcome | Significance |
|---|---|---|---|
| U.S. v. O’Hagan | Misappropriation theory of insider trading | Conviction affirmed | Expanded insider trading liability |
| Chiarella v. U.S. | Duty to disclose for non-insiders | Conviction overturned | Limited classical theory |
| SEC v. Texas Gulf Sulphur | Insider trading by company insiders | Conviction affirmed | Classical insider trading framework |
| U.S. v. Newman | Tippee liability and knowledge requirements | Conviction overturned | Raised prosecution burden |
| U.S. v. Salman | Tippee liability for gifts to relatives | Conviction affirmed | Broadened tippee liability |
| U.S. v. Blaszczak | Misappropriation in government info context | Conviction affirmed | Applied theory beyond corporate insiders |
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