Brief Fact Summary.

O'Hagan (Defendant), an attorney, was indicted for trading securities in Pillsbury based on confidential information he gained due to his association with the corporation's law firm.

Synopsis of Rule of Law.

(1) A person violates SEC 10(b) and Rule 10b-5 when he misappropriates confidential information and trades on that information for his own personal benefit.(2) The SEC (Plaintiff) did not overstep its rulemaking authority when it promulgated Rule 14e-3(a), which prohibits trading on undisclosed information in a tender offer situation, even where the person has no fiduciary duty to disclose the information.

Facts.

The law firm of Dorsey & Whitney was retained by Grand Metropolitan PLC (Grand Met) as counsel in a proposed tender offer for the stock of Pillsbury.O'Hagan (Defendant), a partner in the firm, was not assigned to the case.But during the time of the representation, Defendant purchased a total of 2,500 Pillsbury call options and 5,000 shares of common stock.Following the announcement of the tender offer, he sold his interests and profited more than $4.3 million.The Securities and Exchange Commission (SEC) (Plaintiff) began investigating Defendant and indicted him on 57 counts of mail ad securities fraud, fraudulent trading, and money laundering.He was convicted on all 57 counts and sentenced to 41 months in prison.The Court of Appeals for the Eighth Circuit reversed all of the convictions on the basis that Rule 10b-5 liability may not be based on a misappropriation theory.Furthermore, the court held that SEC Rule 14e-3(a) was beyond the scope of the SEC's (Plaintiff) power to make rules.Because of this, none of the convictions could stand since they were based on the underlying securities fraud violations.The Supreme Court granted certiorari to determine the propriety of the misappropriation theory, and the authority of the SEC (Plaintiff) to promulgate Rule 14e-3(a).

Issue.

(1) Does a person violate SEC 10(b) and Rule 10b-5 and thereby violate his fiduciary duty by misappropriating confidential information by trading on that information for his own personal benefit?(2) Did the SEC (Plaintiff) overstep its rulemaking authority when it promulgated Rule 14e-3(a), which prohibits trading on undisclosed information in a tender offer situation, even where the person has no fiduciary duty to disclose the information?