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High court takes up insider trading case

April 16, 1997

WASHINGTON (AP) _ The Clinton administration asked the Supreme Court today to salvage a major tool for prosecuting ``cunning, deceptive practices″ in some insider stock-trading cases.

``Information is the lifeblood of the securities markets,″ Justice Department lawyer Michael R. Dreeben told the court. ``Investors do assume that they are not trading with someone who acquired an informational advantage simply by fraud.″

The government contends a lower court opened a loophole in protections against securities fraud when it threw out former Minneapolis lawyer James O’Hagan’s insider trading convictions.

But O’Hagan’s lawyer said prosecutors used an unfairly broad definition of insider trading to charge him with misappropriating confidential information about a planned attempted takeover of Pillsbury Co.

O’Hagan’s prosecution was based on ``a set of legal theories that are not incorporated in the text of any statute,″ said his lawyer, John D. French.

``You may not put people at risk of prosecution ... by announcing that non-fraudulent acts are fraudulent acts,″ French argued.

But Justice Antonin Scalia said a federal securities law apparently authorized the government to prohibit some acts in an effort to prevent securities fraud. ``That’s how it reads,″ the justice said.

O’Hagan was convicted of illegally earning more than $4.3 million by trading in Pillsbury stock after learning at his law firm that Pillsbury was going to be the target of a takeover attempt.

French said that because O’Hagan’s law firm did not work for Pillsbury, he owed no legal duty to the company or to shareholders of its stock.

But Dreeben contended that such prosecutions for misappropriation of insider information do not depend on someone’s legal duty to the company being targeted for takeover. Instead, he said, such prosecutions rely on the person’s fraudulent acts related to his or her securities trading.

The law aims to ``pick up unforeseen cunning, deceptive practices that people might use″ in stock trading, Dreeben said.

The court is expected to decide by July whether to reinstate O’Hagan’s convictions and uphold the government’s broadened definition of insider trading.

Insider trading ordinarily applies to transactions by people who have confidential information because they work for the company whose stock they are trading, or by people who are tipped off by an insider.

But during the 1980s, the Securities and Exchange Commission expanded its rules to bar trading in a company’s stock by someone who has confidential information but does not work for the company or owe it any legal duty.

O’Hagan’s law firm had been hired to represent a British company, Grand Metropolitan PLC, before announcement of its 1988 attempt to take over Pillsbury. The law firm later resigned its representation of Grand Metropolitan before the takeover bid was announced.

O’Hagan was convicted in 1994 of 57 counts, including securities fraud, mail fraud and fraudulent trading in connection with a takeover offer. He was sentenced to 18 months in prison.

The 8th U.S. Circuit Court of Appeals reversed the convictions. It said federal law does not allow a securities fraud conviction such as O’Hagan’s to be based on ``misappropriation″ of inside information because it does not require deception or a breach of duty to others involved in the stock transactions.

The appeals court also threw out a separate SEC rule used to prosecute people for insider trading related to takeover offers. The court said federal securities law does not let the SEC outlaw such transactions by people who do not owe a duty of trust to the targeted company.

The court also reversed O’Hagan’s mail fraud convictions because they were based on the securities fraud counts.

The case is U.S. vs. O’Hagan, 96-842.

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