Don't Ask, Just Tell: Insider Trading after United States v. O'Hagan

Abstract

The United States Supreme Court validated the misappropriation theory in United States v. O'Hagan, but unfortunately rendered a confusing opinion that left many questions unresolved. In this article we discuss the history of the Supreme Court's Section 10(b) jurisprudence as it relates to insider trading, giving particular attention to the Court's insistence prior to O'Hagan that "a material misrepresentation or material failure to disclose," not merely a breach of fiduciary duty, must exist to impose liability under Section 10(b). We then discuss the pervasive inconsistencies among lower courts in interpreting the misappropriation theory, and how the O'Hagan decision does little to clarify this ambiguous body of case law. We also discuss the many scenarios in which it is not certain when a fiduciary relationship exists and when a fiduciary is barred from using his principal's information. On examination of these scenarios, it is clear that the misappropriation theory remains exceptionally vague, particularly as a standard for criminal liability. We further explore how courts can best define the scope of the misappropriation theory. We conclude that Congress or the SEC should act to replace or supplement the misappropriation theory with a clearer definition of when it is and is not illegal for corporate outsiders to trade while in possession of material, nonpublic information.