United States v. O'Hagan

Misappropriation theory of insider trading and tender-offer fraud rules.

James O'Hagan, a partner at a law firm representing a bidder in a potential tender offer for Pillsbury, bought Pillsbury securities and options before the bid became public, even though he did no work on the representation.

The Court upheld insider-trading liability under the misappropriation theory and sustained SEC Rule 14e-3.

Justice Ginsburg reasoned that a trader commits deception when he misappropriates confidential information in breach of a duty owed to the source of the information and secretly uses it for securities trading. The fraud lies in feigning loyalty to the information source while converting the information for personal trading gain.

1. How does the rule affect information production, investor reliance, and enforcement costs?
2. What are the likely error costs for lawful market activity and for undetected misconduct?