Does a person commit a violation of the Securities and Exchange Commission’s Section 10(b) and Rule 10b-5, and therefore a breach of their fiduciary responsibility, if they trade on sensitive information that they have misappropriated for their own personal gain?

Using the U.S court case above, please answer the questions below, in detail (should be around 750-800 words):

1) Case Facts

2) Procedural History

3) Issue(s) in Question

4) The Court’s Holding

5) Explanation of Final Disposition

6) My Opinion

Here is an example from the case of United States V. O’hagan:

Case Facts:

The Grand Metropolitan chose to appoint Dorsey & Whitney as its legal counsel in connection with a prospective tender offer for the common shares of the Pillsbury Company. Defendant O’Hagan, a partner at Dorsey & Whitney who was not involved in the representation, started buying call options and shares of Pillsbury stock. The price of Pillsbury shares rose after Dorsey & Whitney withdrew as counsel, Grand Met made public its tender offer, and O’Hagan made a profit of nearly 4 million dollars by selling stocks and options. They alleged that O’Hagan stole important, private information about Grand Met’s tender offer and used it for his own trading purposes. By doing this, he cheated both his law firm and the company. The investigation into O’Hagan was initiated by the Securities and Exchange Commission (the plaintiff in this case), which resulted in a 57-count indictment against O’Hagan.

In the indictment, O’Hagan was accused of committing federal mail fraud and breaking money laundering laws, in addition to violating SEC Rule 10b-5 and Section 10(b) of the Securities Exchange Act of 1934 by participating in unlawful insider trading in conjunction with a tender offer. O’Hagan was found guilty on each of the 57 charges and received a jail term of 41 months as a result. However, the Court of Appeals for the Eighth Circuit determined that the prosecution’s “misappropriation theory” of securities fraud could not be used to establish 10(b) because Rule 14e-3(a) exceeded the SEC’s rule-making authority because it did not necessitate a breach of duty. This was due to the fact that Rule 14e-3(a) does not require a violation of fiduciary duty.

As a result of this, none of the convictions could be upheld since they were founded on the underlying breaches of the securities fraud laws. The petition for a writ of certiorari was granted by the Supreme Court so that it may decide whether or not the misappropriation argument is valid and whether or not the SEC has the jurisdiction to impose Rule 14e-3 (a).

Procedural History:

The defendant was charged with defrauding investors out of money from securities. The defendant filed a motion to dismiss the indictment, saying that the prosecution had failed to provide sufficient evidence to establish that he was guilty of any crime. The request to dismiss that was filed by the defendant was refused by the district court. The defendant filed an appeal with the Court of Appeals in the Eighth Circuit of the United States. The ruling of the lower district court was upheld by the Court of Appeals. After that, the defendant filed an appeal with the Supreme Court of the United States. The ruling of the Court of Appeals was upheld by the Supreme Court.

Issue(s) in Question:

1) Does a person commit a violation of the Securities and Exchange Commission’s Section 10(b) and Rule 10b-5, and therefore a breach of their fiduciary responsibility, if they trade on sensitive information that they have misappropriated for their own personal gain?

2) Did the SEC, (the plaintiff in this case), exceed the scope of its authority when it imposed Rule 14e-3(a)? This rule prohibits buying and selling on unpublicized information in the event of a tender offer, even if the person involved does not have a fiduciary obligation to disclose the information.

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