We're Still against Fraud, Aren't We? United States V. O'Hagan: Trimming the Oak in the Wrong Season
Sullivan, Timothy, St. John's Law Review
The Securities and Exchange Commission ("SEC" or "Commission") and government prosecutors1 have utilized Rule 10b-5 as a primary weapon against insider trading.2 This method of enforcement began when Securities and Exchange Commissioner Sumner Pike indicated approval of the rule by asking, "Well, we are against fraud aren't we?"3 Although section 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act")4 was not initially designed to be used in such capacity,5 the section's broad language has allowed the government to utilize it to combat trading by corporate insiders.6 Indeed, Chief Justice Rehnquist noted the undefined and expansive powers of Rule 10b-5 when analogizing the Rule to "a judicial oak which has grown from little more than a legislative acorn."7
The government has brought cases under two theories of Rule 10b-5 liability, colloquially referred to as the "classical theory"8 and the "misappropriation theory."9 The misappropriation theory was first introduced by the government in Chiarella v. United States,10 where the Supreme Court ultimately declined to address its validity because the issue had not been submitted to the jury.ll Five members of the Chiarella court, however, did indicate varying levels of support for the theory.l2 Thereafter, several circuit courts have expressed approval of the misappropriation theory.l3 Recently, however, the theory has been strongly contested at the federal appellate level.'4 In United States v. O'Hagan,15 the United States Court of Appeals for the Eighth Circuit became the second circuit court to reject this fixture of the government's Rule 10b-5 prosecutorial arsenal.16 Consequently, the Supreme Court granted the government's petition for certiorari in the O'Hagan case, and is expected to render a decision on this split among the circuits in early summer 1997.17
In O'Hagan, the defendant was a partner in the Minneapolis law firm of Dorsey & Whitney.18In July 1988, a large Londonbased company, Grand Met PLC, retained the Dorsey & Whitney firm to act as local counsel in a potential acquisition of the Minneapolis-based Pillsbury Company.19 In August 1988, armed with knowledge that the acquisition of Pillsbury was likely, O'Hagan began purchasing Pillsbury securities.20 By October 4, 1988, when Grand Met PLC publicly announced its tender offer for Pillsbury, O'Hagan had accumulated substantial positions in Pillsbury securities.21 After the announcement, the price of Pillsbury stock rose from $39 per share to nearly $60 per share.22
O'Hagan thereafter liquidated his entire position in Pillsbury securities, reaping over $4,000,000 in profits.23 The government subsequently brought fifty-seven charges against O'Hagan, which included mail fraud, violations of federal money laundering statutes, and violations of federal securities laws.24 A trial ensued and a jury found O'Hagan guilty on all fifty-seven counts.25 On appeal, O'Hagan argued that the misappropriation theory, on which the government relied to convict him of securities fraud, was impermissible as a matter of law.26 The Eighth Circuit agreed and noted that because his convictions for mail fraud and money laundering were predicated on the securities law violations,27 they were forced to reverse and remand the case to the district court for dismissal of the entire indictment.23
Writing for the majority, Judge Hansen concluded that neither the statutory language of section 10(b)29 nor the Supreme Court precedent interpreting that section 30 supported the use of the misappropriation theory. In holding that the misappropriation theory failed to meet the "deception" and "in connection with" requirements of section 10(b),31 Judge Hansen pulled language from a patchwork of Supreme Court precedent, which warned against overbroad constructions of section 10(b).32 Similarly, Judge Hansen criticized those courts which have adopted the misappropriation theory for …
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Publication information: Article title: We're Still against Fraud, Aren't We? United States V. O'Hagan: Trimming the Oak in the Wrong Season. Contributors: Sullivan, Timothy - Author. Journal title: St. John's Law Review. Volume: 71. Issue: 1 Publication date: Winter 1997. Page number: 197+. © St. John's Law Review Association Fall 2008. Provided by ProQuest LLC. All Rights Reserved.
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