James O’Hagan was a partner in the law firm Dorsey & Whitney in Minneapolis, Minnesota. Grand Metropolitan PLC (Grand Met), a company based in London, England, hired Dorsey & Whitney to represent it in a secret tender offer for the stock of the Pillsbury Company, headquartered in Minneapolis. While this transaction was still secret, O’Hagan began purchasing call options for Pillsbury stock. Each call option gave O’Hagan the right to purchase 100 shares of Pillsbury stock at a specified price.
O’Hagan continued to purchase call options for two months, and he became the largest holder of call options for Pillsbury stock. O’Hagan also purchased 5,000 shares of Pillsbury common stock at $ 39 per share. These purchases were all made while Grand Met’s proposed tender offer for Pillsbury remained secret to the public. When Grand Met publicly announced its tender offer one month later, Pillsbury stock increased to nearly $ 60 per share. O’Hagan sold his Pillsbury call options and common stock, making a profit of more than $ 4.3 million.
The U. S. Department of Justice charged O’Hagan with criminally violating Section 10(b) and Rule 10b 5. This was not a case of classic insider trading because O’Hagan did not trade in the stock of his law firm’s client, Grand Met, but the government alleged that O’Hagan was liable under the misappropriation theory for trading in Pillsbury stock by engaging in deceptive conduct by misappropriating the secret information about Grand Met’s tender offer from his employer, Dorsey & Whitney, and from its client, Grand Met. Did O’Hagen act ethically in this case? Did O’Hagen act illegally in this case? United States v. O’Hagen, 521 U. S. 642, 117 S. Ct. 2199, 1997 U. S. Lexis 4033 (Supreme Court of the United States)