Opinion ID: 774028
Heading Depth: 3
Heading Rank: 2

Heading: The Supreme Court's Decision In O'Hagan

Text: 30 In O'Hagan, the Supreme Court resolved an inter-circuit conflict regarding the validity of the misappropriation theory and held that a lawyer who traded in the shares of the target company of a proposed acquisition based on information misappropriated from his law firm and its client, the company seeking to acquire the target, violated section 10(b). O'Hagan, 521 U.S. at 653. The Court agreed that section 10(b)'s deception requirement could be predicated on a fraud on the source of confidential information instead of a buyer or seller of securities, but it did not fully endorse the broad rationale this Circuit provided in Carpenter for why the deception of a source of confidential information was in connection with the purchase or sale of a security. 31 As defined by the Supreme Court in O'Hagan, the misappropriation theory holds that a section 10(b) violation occurs when an individual misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information. Id. at 652. Under O'Hagan, the deception requirement of section 10(b) is satisfied by the misappropriator's feigning fidelity to the source of [the confidential] information. Id. at 655. According to the Court, [a] company's confidential information... qualifies as property to which the company has a right of exclusive use and [t]he undisclosed misappropriation of such information, in violation of a fiduciary duty... constitutes fraud akin to embezzlement - the fraudulent appropriation to one's own use of the money or goods entrusted to one's care by another. Id. at 654 (internal quotation marks and citations omitted). Because the lawyer O'Hagan had breached the fiduciary duty he owed both to his law firm and to the firm's client to keep their information confidential and not appropriate such information to his own use, he had engaged in deception within the meaning of section 10(b). 3 32 The Court held that section 10(b)'s requirement that the deception be in connection with the purchase or sale of any security was satisfied because the fiduciary's fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities. The securities transaction and the breach of duty thus coincide. Id. at 656. That is, O'Hagan legitimately possessed the information given his fiduciary relationship with the source of the information, and the misappropriation occurred only when he used that information to trade securities. 33 The Court distinguished, as not satisfying the in connection with requirement, a scenario in which an employee embezzles money from his or her employer for the purpose of buying securities. The Court did so on the ground that money can buy, if not anything, then at least many things; its misappropriation may thus be viewed as sufficiently detached from a subsequent securities transaction that § 10(b)'s 'in connection with' requirement would not be met. Id. at 656-57. In contrast, the Court stated, the information targeted by the misappropriation theory is information of the sort that misappropriators ordinarily capitalize upon to gain no-risk profits through the purchase or sale of securities, id. at 656 - i.e., information that ordinarily derives its value... from its utility in securities trading. Id. at 657. The misappropriation of such information thus possesses a sufficient connection to securities trading to satisfy section 10(b) and Rule 10b-5.